Liabilities PowerPoint Authors Brandy Mackintosh Lindsay Heiser Learning Objective 101 Explain the role of liabilities in financing a business The Role of Liabilities Current liabilities are shortterm obligations that will be paid with current assets within the companys current ID: 257110
Download Presentation The PPT/PDF document "Chapter 10" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Chapter 10
Liabilities
PowerPoint Authors:
Brandy Mackintosh
Lindsay
HeiserSlide2
Learning Objective 10-1
Explain the role of liabilities in financing a business.Slide3
The Role of Liabilities
Current liabilities are 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.
Buys goods and services on credit
Obtains short-term loans
Issues long-term debt
Liabilities are created when a company:Slide4
The Role of Liabilities
The liability section of the General Mills 2010 and 2011 comparative balance sheets. Slide5
Learning Objective 10-2
Explain how to account for common types of current liabilities.Slide6
Measuring Liabilities
Initial Amount of the Liability
Cash Equivalent
Additional Liability Amounts
Increase Liability
Payments Made
Decrease LiabilitySlide7
Current Liabilities
Accounts Payable
Accrued Liabilities
Liabilities that have been incurred but not yet paid.
Increases
(Credited)
Decreases
(Debited)
when a company receives goods or services on credit
when a company pays on its accountSlide8
Accrued Payroll
Payroll Liabilities
Payroll Deductions
Employer Payroll Taxes
Payroll Deductions
Payroll deductions are either required by law or voluntarily requested by employees and create a current liability for the company. Examples include:
Income tax
FICA tax
Other deductions (charitable donations, union dues, etc.)Slide9
Accrued Payroll
Gross Pay
Payroll Deductions:
Federal Income Taxes
FICA Taxes
Other
Total Payroll Deductions
Net Pay
$ 58.0048.80 10.00
$ 600.00 116.80
$ 483.20Slide10
Accrued Payroll
Adam Palmer earned gross pay of $600 in the current payroll period. General Mills withheld $58 in Federal income taxes, $48.80 for FICA, and $10 for United Way, resulting in net pay of $483.20. Let’s assume that General Mills has 1,000 workers just like Adam.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -$483,200
FIT Withheld (+L) +$58,000
FICA Payable (+L)+$48,800
United Way (+L) +$10,000
Payroll
Expense(+E, -SE) -$600,000
2
Record
dr Wages and Salaries Expense (+E, -SE)
cr Withheld Income Taxes Payable (+L)
cr FICA Payable (+L)
cr United Way Payable (+L)
cr Cash (-A)
58,000
48,800
10,000
483,200
600,000Slide11
Accrued Payroll
Employer Payroll Taxes
Employers have other liabilities related to payroll.
FICA tax (a “matching” contribution)
Federal unemployment tax
State unemployment tax
Assume General Mills was required to contribute $48,800 for FICA, $750 for federal unemployment tax, and $4,000 for state unemployment tax.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
FICA Payable (+L) +48,800
FUTA Payable (+L) +750
SUTA Payable (+L) +4,000
Payroll Tax
Expense (+E, -SE) -53,550
2
Record
dr Payroll Tax Expense (+E, -SE)
cr FICA Tax Payable (+L)
cr Federal Unemployment Tax Payable (+L)
cr State Unemployment Tax Payable (+L)
48,800
750
4,000
53,550Slide12
Accrued Income Taxes
Corporations calculate
taxable income
by
subtracting tax-allowed expenses from revenues. This taxable income is then multiplied by a tax rate, which for most large corporations is about 35 percent.
Let’s assume General Mills calculated taxable income to be $1,000,000, and is subject to a 35% tax rate, so income taxes owed are $350,000 ($1,000,000 × 35%)
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Income Tax
Payable (+L) +350,000
Income Tax
Expense (+E, -SE) -350,000
2
Record
dr Income Tax Expense (+E, -SE)
cr Income Tax Payable (+L)
350,000
350,000Slide13
Notes Payable
Four key events occur with any note payable:
establishing the note,
accruing interest incurred but not paid,
recording interest paid, and
recording principal paid.
1
2
3
4Slide14
Notes Payable
1. Establish the note on November 1, 2012.
Assume that on November 1, 2012, General Mills borrowed $100,000 cash on a one-year note that required General Mills to pay 6 percent interest and $100,000 principal, both on October 31, 2013.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (+A) +100,000
Notes
Payable (+L) +100,000
2
Record
dr Cash (+A)
cr Notes Payable (+L)
100,000
100,000Slide15
Notes Payable
2. Accrue interest owed but not paid on December 31, 2012.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Interest
Payable (+L) +1,000
Interest
Expense (+E, -SE) -1,000
2
Record
dr Interest Expense (+E, -SE)
cr Interest Payable (+L)
1,000
1,000Slide16
Notes Payable
3. Record interest paid on October 31, 2013.
2
Record
dr Interest Expense (+E, -SE)
dr Interest Payable (-L)
cr Cash (-A)
6,000
5,000
1,000
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Interest
Payable (-L) -1,000
Interest
Expense (+E, -SE) -5,000Slide17
Notes Payable
4. Record principal paid of $100,000 on October 31, 2013.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -100,000
Note
Payable (-L) -100,000
2
Record
dr Note Payable (-L)
cr Cash (-A)
100,000
100,000Slide18
Current Portion of Long-Term Debt
Long-Term Debt
Current Portion of Long-term Debt
Noncurrent Portion of Long-term Debt
Borrowers must report in Current Liabilities the portion of
long-term debt that is due to be paid within one year. Slide19
Additional Current Liabilities
Sales Tax Payable
Payments collected from customers at time of sale create a liability that is due to the state government.
Unearned Revenue
Cash received in advance of providing services creates a liability of services due to the customer .Slide20
Additional Current Liabilities
Best Buy sells a television for $1,000 cash plus 5 percent sales tax.
$1,000 × 5% = $50 sales tax collected
When Best Buy pays the sales tax to the state government, its accountants will reduce Sales Tax Payable (with a debit) and reduce Cash (with a credit).
2
Record
dr Cash (+A)
cr Sales Tax Payable (+L)
cr Sales Revenue (+R, +SE)
50
1,000
1,050
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (+A) +1,050
Sales Tax
Payable (+L) +50
Sales
Revenue (+R, +SE) +1,000Slide21
Additional Liabilities
On May 14
th
2010, Live Nation Entertainment (the owner of Ticketmaster), received $8 million cash for advance ticket sales for two Lady Gaga concerts to be held on February 21 and 22, 2011.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (+A) +8
Unearned
Revenue (+L) +8
2
Record
dr Cash (+A)
cr Unearned Revenue (+L)
8
8Slide22
Additional Liabilities
When the February 21
st
concert is held, Live Nation Entertainment can recognize one half of the unearned revenue as earned revenue, as they have fulfilled part of the liability.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Unearned
Revenue (-L) -4
Concert
Revenue (+R, +SE) +4
2
Record
dr Unearned Revenue (-L)
cr Concert Revenue (+R, +SE)
4
4Slide23
Learning Objective 10-3
Analyze and record bond liability transactions.Slide24
Long-Term Liabilities
Bonds
are financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now.
Common Long-Term Liabilities
Long-term notes payable
Deferred income taxes
Bonds payable Slide25
Bonds
Bond Pricing
The bond price involves present value computations and is the amount that investors are willing to pay on the issue date for the bonds.
Key Elements of a Bond
Maturity date
Face value
Stated interest rate
12
12
$1,000
×
6%
×
= $60
Interest ComputationSlide26
Bonds
Balance Sheet Reporting of Bond Liability
Relationships between Interest Rates and Bond PricingSlide27
Bonds
General Mills receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, so the bonds are issued at total face value (100 × $1,000 = $100,000).
Bonds Issued at Face Value
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (+A) +100,000
Bonds
Payable (+L)+100,000
2
Record
dr Cash (+A)
cr Bonds Payable (+L)
100,000
100,000Slide28
Bonds
General Mills issues 100 of its $1,000 bonds at a price of 107.26 percent of face value, the company will receive $107,260 (100 × $1,000 × 1.0726).
Bonds Issued at a Premium
2
Record
dr Cash (+A)
cr Bonds Payable (+L)
cr Premium on Bonds Payable (+L)
100,000
7,260
107,260
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (+A) +107,260
Bonds Payable (+L) +100,000
Premium on
Bonds Payable (+L) +7,260Slide29
$100,000 - $93,376 = $6,624 discount
Bonds
General Mills receives $93,376 for bonds with a total face value of $100,000, the cash-equivalent amount is $93,376, which represents the liability on that date. These bonds are issued at a discount because the cash received is less than the face value of the bonds.
Bonds Issued at a Discount
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (+A) +93,376
Bonds Payable (+L) +100,000
Discount on
Bonds Payable (+xL,-L)-6,624
2
Record
dr Cash (+A)
dr Discount on Bonds Payable (+xL, -L)
cr Bonds Payable (+L)
100,000
93,376
6,624Slide30
Interest on Bonds Issued at Face Value
General Mills issues bonds on January 1, 2013, at their total face value of $100,000. The bonds have an annual stated interest rate of 6 percent payable in cash on December 31 of each year, General Mills will need to accrue an expense and liability for interest at the end of each accounting period. The end of the first accounting period is January 31, 2013.
$100,000 × 6% × 1/12 = $500 interest
2
Record
dr Interest Expense (+E, -SE)
cr Interest Payable (+L)
500
500
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Interest Payable (+L) +500
Interest
Expense (+E, -SE) -500Slide31
Interest on Bonds Issued at a Premium
Cash proceeds
>
Face value
Cash proceeds – Face value = Premium
Interest expense
<
Cash interest paid
Interest expense = Cash interest paid – Premium amortizationSlide32
Interest on Bonds Issued at a Discount
Cash proceeds
<
Face value
Face value – Cash proceeds = Discount
Interest expense
>
Cash interest paid
Interest expense = Cash interest paid+ Discount amortizationSlide33
Bond Retirement
General Mills’ bonds were retired with a payment equal to their $100,000 face value. Let’s analyze and record this transaction.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -100,000
Bonds Payable (-L) -100,000
2
Record
dr Bonds Payable (-L)
cr Cash (-A)
100,000
100,000Slide34
Assume that in 2003, General Mills issued $100,000 of bonds at face value. Ten years later, in 2013, the company retired the bonds early. At the time, the bond price was 102, so General Mills made a payment of $102,000.
Cash Payment $103,000
Carrying Value 100,000
Loss on Retirement $3,000
Bond Retirement
The early retirement of bonds has three financial effects. The company
pays cash,
eliminates the bond liability, and
reports either a gain or a loss.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -102,000
Bonds Payable (-L) -100,000
Loss on Bond
Retirement(+E,-SE) -2,000
2
Record
dr Bonds Payable (-L)
dr Loss on Bond Retirement (+E, -SE)
cr Cash (-A)
102,000
100,000
2,000Slide35
Learning Objective 10-4
Describe how to account for contingent liabilities.Slide36
Contingent Liabilities
Contingent liabilities are potential liabilities that arise from past transactions or events, but their ultimate resolution depends (is contingent) on a future event. Slide37
Learning Objective 10-5
Calculate and interpret the quick ratio and the times interest earned ratio.Slide38
Evaluate the Results
Two financial ratios are commonly used to assess a company’s ability to generate resources to pay future amounts owed:
Quick ratio
Times interest earned ratio
Quick Ratio =
(Cash + Short-term Investments + Accounts Receivable, Net)
Current Liabilities
Times Interest
Earned Ratio
=
(Net Income + Interest Expense + Income Tax Expense)
Interest ExpenseSlide39
Evaluate the Results
At the end of its 2011 fiscal year, General Mills reported $620 million of cash and cash equivalents, no short-term investments, and $1,162 million of net accounts receivable. The company reported $3,659 million in total current liabilities.
Quick Ratio =
(Cash + Short-term Investments + Accounts Receivable, Net)
Current Liabilities
$620 + 0 + 1,162
3,659
=
0.487
A quick ratio of 0.487 implies that General Mills would be able to pay only 48.7 percent of its current liabilities, if forced to pay them immediately. However, not all current liabilities are to be paid immediately.Slide40
Evaluate the Results
In 2011, General Mills reported net income of $1,798 million and interest expense of $346 million, and income tax expense of $721 million. Let’s calculate the times interest earned for 2011.
$1,798 + $346 + $721
$346
=
8.28 times
The ratio means that General Mills generates $8.28 of income (before the costs of financing and taxes) for each dollar of interest expense.
Reaching this level of interest coverage was important to General Mills because its long-term debt note reported that loan covenants required a minimum ratio of 2.5.
Times Interest
Earned Ratio
=
(Net Income + Interest Expense + Income Tax Expense)
Interest ExpenseSlide41
Chapter 10
Supplement 10AStraight-Line Method of AmortizationSlide42
Cash Interest $6,000
Amortization of
Premium
(1,815)
Interest Expense $4,185
Bond Premium
Bond premium or discount
decreases
each year, until it is completely eliminated on the bond’s maturity date. This process is called amortizing the bond premium or discount. The
straight-line method of
amortization reduces the premium or discount by an equal amount each period.
Recall our example when General Mills received $107,260 on the issue date (January 1, 2013) but repays only $100,000 at maturity (December 31, 2016). Under the straight-line method, this $7,260 is spread evenly as a reduction in interest expense over the four years ($7,260 ÷ 4 =
$1,815
per year).
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Premium on
Bonds Payable (-L) -1,815
Interest
Expense (+E, -SE) -4,185
2
Record
dr Interest Expense (+E, -SE)
dr Premium on Bonds Payable (-L)
cr Cash (-A)
6,000
4,185
1,815Slide43
Bond Premium
Amortization Schedule of Bonds Issued at a Premium
$7,260 ÷ 4 = $1,815
$100,000 × 6% × 12/12 = $6,000
$6,000 - $1,815 = $4,185
$7,260 - $1,815 = $5,445
$107,260 – $1,815 = $105,445
Notice that each of these amounts would plot as a straight-line!Slide44
Cash Interest $6,000
Amortization of
Discount
1,656
Interest Expense $7,656
Bond Discount
Recall our example where General Mills received $93,376 for four-year bonds with a total face value of $100,000, implying a discount of $6,624. The annual amortization of the discount is
$1,656
($6,624 ÷ 4).
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Discount on
Bonds Payable(-xL,+L)+1,656
Interest
Expense (+E, -SE) -7,656
2
Record
dr Interest Expense (+E, -SE)
cr Discount on Bonds Payable (-xL, +L)
cr Cash (-A)
1,656
6,000
7,656Slide45
Bond Discount
Amortization Schedule of Bonds Issued at a Discount
$6,624 ÷ 4 = $1,656
$100,000 × 6% × 12/12 = $6,000
$6,000 + $1,656 = $7,656
$6,624 - $1,656 = $4,968
$93,376 + $1,656 = $95,032Slide46
Chapter 10Supplement 10B
Effective-Interest Method of AmortizationSlide47
Effective Interest Amortization
The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds because it correctly calculates interest expense by multiplying the market interest rate times the carrying value of the bonds.
Interest (I) = Principal (P) × Rate (R) × Time (T)
Interest Expense = Carrying Value × Market Rate × n/12
$4,290 = $107,260 × 4% × 12/12
When General Mills adds this $7,260 premium to the $100,000 face value, it reports a carrying value of $107,260 ($100,000 + $7,260) on January 1, 2013. The proceeds indicates that the market interest rte was 4 percent.Slide48
Interest (I) = Principal (P) × Rate (R) × Time (T)
Interest Expense = Carrying Value × Market Rate × n/12
$4,290 = $107,260 × 4% × 12/12
Cash Interest $ 6,000
Effective Interest 4,290
Amortization of Premium $1,710
Effective Interest Amortization
General Mills issued 6% stated rate bonds for $107,260. The market rate of interest on these bonds is 4%. The face amount of the bonds, $100,000, results in cash interest is $6,000 ($100,000 × 6%). Let’s amortize the premium on the bonds at the first interest payment date.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Premium on
Bonds Payable (-L) -1,710
Interest
Expense (+E, -SE) -4,290
2
Record
dr Interest Expense (+E, -SE)
dr Premium on Bonds Payable (-L)
cr Cash (-A)
6,000
4,290
1,710Slide49
Effective Interest Amortization
Effective Interest Amortization of Bonds Issued at a Premium
$107,260 × 4% × 12/12 = $4,290
$100,000 × 6% × 12/12 = $6,000
$107,260 - $1,710 = $105,550
$6,000 - $4,290 = $1,710
$7,260 - $1,710 = $5,550
Interest Expense decreases and Premium Amortization
increases each period. Cash interest is unchanged.Slide50
Effective Interest Amortization
Interest (I) = Principal (P) × Rate (R) × Time (T)
Interest Expense = Carrying Value × Market Rate × n/12
$7,470 = $93,376 × 8% × 12/12
General Mills issued $100,000 face value, 6%, 4-year bonds at a market price to yield investors 8%. The bonds were issued at a discount of $6,624. Let’s determine the effective interest for the first interest payment period.
Cash Interest $ 6,000
Effective Interest 7,470
Amortization of Discount $ 1,470
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Discount on
Bonds Payable(-xL,+L)+1,470
Interest
Expense (+E, -SE) -7,470
2
Record
dr Interest Expense (+E, -SE)
cr Discount on Bonds Payable (-L)
cr Cash (-A)
1,470
6,000
7,470Slide51
Effective Interest Amortization
$93,376 × 8% × 12/12 = $7,470
$100,000 × 6% × 12/12 = $6,000
$93,376 + $1,470 = $94,846
$7,470 - $6,000 = $1,470
$6,624 - $1,470 = $5,154
Effective Interest Amortization of Bonds Issued at a Discount
Both Interest Expense and Discount Amortization
increase each period. Cash interest is unchanged.Slide52
Chapter 10Supplement 10C
Simplified Effective-Interest AmortizationSlide53
Accounting for Bond Issue.
The shortcut method records the bonds at issuance at
Bonds Payable, Net
. That is face amount less discount or face amount plus premium.
The following journal entries demonstrate how the shortcut is applied to
bonds issued at a premium, at face value, and at a discount.Slide54
Bond Premium
Interest (I) = Principal (P) × Rate (R) × Time (T)
Interest Expense = Bonds Payable, Net × Market Rate × n/12
Interest Expense
$4,290 = $107,260 × 4% × 12/12
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Bonds
Payable, Net (-L) -1,710
Interest
Expense (+E, -SE) -4,290
2
Record
dr Interest Expense (+E, -SE)
dr Bonds Payable, Net (-L)
cr Cash (-A)
6,000
4,290
1,710Slide55
Bond Discount
Interest (I) = Principal (P) × Rate (R) × Time (T)
Interest Expense = Bonds Payable, Net × Market Rate × n/12
Interest Expense
$7,470 = $93,376 × 8% × 12/12
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -6,000
Bonds
Payable, Net (+L) -1,470
Interest
Expense (+E, -SE) -7,470
2
Record
dr Interest Expense (+E, -SE)
cr Bonds Payable, Net (+L)
cr Cash (-A)
1,470
6,000
7,470Slide56
Chapter 10Solved Exercises
M10-5, E10-2, E10-3, E10-8, E10-10,
PA10-3Slide57
As of December 31,
Current Liabilities:
Current Portion of Long-term Debt
Long-term Debt
Total Liabilities
2014
$ 3,000
10,000
$ 13,000
2013$ 2,000
13,000
$ 15,000
M10-5 Reporting Current and Noncurrent Portions of Long-Term Debt
Assume that on December 1, 2013, your company borrowed $15,000, a portion of which is to be repaid each year on November 30.
Specifically, your company will make the following principal payments: 2014, $2,000; 2015, $3,000; 2016, $4,000; and 2017, $6,000. Show how this loan will be reported in the December 31, 2014 and 2013 balance sheets, assuming that principal payments will be made when required.Slide58
E10-2 Recording a Note Payable through Its Time to Maturity
Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. Target Corporation is one of America’s largest general merchandise retailers.
Each Christmas, Target builds up its inventory to meet the needs of Christmas shoppers. A large portion of Christmas sales are on credit. As a result, Target often collects cash from the sales several months after Christmas. Assume that on November 1, 2013, Target borrowed $6 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 8.0 percent payable at maturity. The accounting period ends December 31.
Required:
Give the journal entry to record the note on November 1, 2013.
Give any adjusting entry required on December 31, 2013.
Give the journal entry to record payment of the note and interest on the maturity date, April 30, 2014, assuming that interest has not been recorded since December 31, 2013.Slide59
E10-2 Recording a Note Payable through Its Time to Maturity
November 1, 2013:
Borrowed on 6-month, 8.0%, note payable.
December 31, 2013 (end of the accounting period):
Adjusting entry for 2 months’ accrued interest ($6,000,000 x 8.0% x 2/12 = $80,000).
April 30, 2014 (maturity date):
Paid note plus interest at maturity.
dr Cash (+A)
cr Note Payable (+L)
6,000,000
6,000,000
dr Interest Expense (+E, -SE)
cr Interest Payable (+L)
80,000
80,000
dr Note Payable (-L)
dr Interest Payable (per above) (-L)
dr Interest Expense ($6,000,000 x 8.0% x 4/12) (+E, -SE)
cr Cash (-A)
6,240,000
6,000,000
80,000
160,000Slide60
E10-3 Recording Payroll Costs
McLoyd
Company completed the salary and wage payroll for March 2013. The payroll provided the following details:
Required:
Considering both employee and employer payroll taxes, use the preceding information to calculate the total labor cost for the company.
Prepare the journal entry to record the payroll for March, including employee deductions (but excluding employer payroll taxes). Employees were paid in March but amounts withheld were not yet remitted.
Prepare the journal entry to record the employer’s FICA taxes and unemployment taxes.Slide61
The total labor cost was $431,380, made up of the $400,000 in gross salaries and wages plus the $28,600 for Employer FICA taxes and $2,780 for unemployment taxes.
Req. 1
Req. 2
dr
Salaries and Wages Expense (+E, -SE) 400
,000
cr Withheld Income Taxes Payable (+L) 37,000 cr FICA Taxes Payable—Employees (+L) 28,600 cr Cash (-A) 334,400
Payroll for March including employee deductions.
March 31, 2013Req. 3
dr
Payroll Tax Expense (+E,-SE) 31
,380
cr
FICA Taxes Payable—Employer (+L) 28,600
cr
Unemployment Taxes Payable (+L) 2,780
Employer payroll taxes on March payroll.
March 31, 2013
E10-3 Recording Payroll Costs with DiscussionSlide62
E10-8 Preparing Journal Entries to Record Issuance of Bonds at Face Value, Payment of Interest, and Early Retirement
On January 1, 2013, Innovative Solutions, Inc., issued $200,000 in bonds at face value. The bonds have a stated interest rate of 6 percent. The bonds mature in 10 years and pay interest once per year on December 31.
Required:
Prepare the journal entry to record the bond issuance.
Prepare the journal entry to record the interest payment on December 31, 2013. Assume no interest has been accrued earlier in the year.
Assume the bonds were retired immediately after the first interest payment at a quoted price of 101. Prepare the journal entry to record the early retirement of the bonds.Slide63
Req. 1
Req. 2
Req. 3
dr
Cash (+A) 200,000
cr
Bonds Payable (+L) 200,000 dr Interest Expense (+E, -SE) 12,000
cr Cash (-A) 12,000($200,000 x 6% x 12/12) = $12,000dr
Bonds Payable (-L) 200,000dr Loss on Bonds Retired (+E, -SE) 2,000 cr Cash (-A) 202,000($200,000 x 101%) = $202,000
E10-8 Preparing Journal Entries to Record Issuance of Bonds at Face Value, Payment of Interest, and Early RetirementSlide64
E10-10 Calculating and Interpreting the Quick Ratio and Times Interest Earned Ratio
At December 31, 2010, Kraft Foods Inc. reported no short-term investments but did report the following amounts (in millions) in its financial statements:
Required:
Compute the quick ratio and times interest earned ratio (to two decimal places) for 2010 and 2009.
Did Kraft appear to have increased or decreased its ability to pay current liabilities and future interest obligations as they become due? Slide65
Req. 1
Req. 2
E10-10 Calculating and Interpreting the Quick Ratio and Times Interest Earned Ratio
2010 = = 0.58
$2,481 + $6,539
$15,660
2009 = = 0.64
$2,101 + $5,197
$11,491
2010 = ($4,114 + $ 2,024 + $1,147) ÷ $2,024 = 3.60
2009 = ($3,021 + $ 1,237 + $1,136) ÷ $1,237 = 4.36Slide66
PA10-3 Recording and Reporting Current Liabilities
During 2013, Lakeview Company completed the following two transactions. The annual accounting period ends December 31.
On December 31, 2013, calculated the payroll, which indicates gross earnings for wages ($80,000), payroll deductions for income tax ($8,000), payroll deductions for FICA ($6,000), payroll deductions for American Cancer Society ($3,000), employer contributions for FICA (matching), state unemployment taxes ($500), and federal unemployment taxes ($100). Employees were paid in cash, but these payments and the corresponding payroll deductions and employer taxes have not yet been recorded.
Collected rent revenue of $6,000 on December 10, 2013, for office space that Lakeview rented to another business. The rent collected was for 30 days from December 11, 2013, to January 10, 2014, and was credited in full to Unearned Rent Revenue.
Required:
Give the journal entries to record payroll on December 31, 2013.
Give ( a ) the journal entry for the collection of rent on December 10, 2013, and
( b ) the
adjusting journal entry on December 31, 2013.Show how any liabilities related to these items should be reported on the company’s balance sheet at December 31, 2013.Slide67
Req. 1
Req. 2
dr
Wage Expense (+E, -SE) 80,000
cr
Withheld Income Tax Payable (+L) 8,000 cr FICA Payable (+L) 6,000 cr American Cancer Society Payable (+L) 3,000
cr Cash (-A) 63,000dr Payroll Tax Expense (+E, -SE) 6,600
cr FICA Payable (+L) 6,000 cr State Unemployment Tax Payable (+L) 500 cr Federal Unemployment Tax Payable (+L) 100
(a) December 10, 2013:dr Cash (+A) 6,000
cr
Unearned Rent Revenue (+L) 6,000
Collection of rent revenue for one month.
(b) December 31, 2013:
dr
Unearned
Rent Revenue (-L) 4
,000
cr
Rent Revenue (+R, +SE) 4,000
Earned 20 days of rent and initially recorded all as unearned. Need to reduce unearned revenue for the 20 days and record it as earned revenue (20/30 x $6,000 = $4,000).
PA10-3 Recording and Reporting Current LiabilitiesSlide68
Req. 3
Balance sheet at December 31, 2013:
Current Liabilities:
Withheld Income Taxes Payable 8,000
FICA Payable 12,000
American Cancer Society Payable 3,000
State Unemployment Tax Payable 500 Federal Unemployment Tax Payable 100 Unearned Rent Revenue 2,000
PA10-3 Recording and Reporting Current LiabilitiesSlide69
End of Chapter 10