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Understanding Current and Long-Term Liabilities in Financial Accounting

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25 diapositives · 454 Views · Jul 13, 2014

This chapter delves into defining current liabilities, including those expected to be paid within one year or the operating cycle. It discusses the classification of known liabilities such as accounts payable and unearned revenues, along with the significance of payroll liabilities. Essential concepts like estimated liabilities, warranty obligations, and contingent liabilities are explained. Additionally, it covers the times interest earned ratio to assess financial health. This comprehensive overview empowers readers to understand and manage company liabilities effectively.

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  1. Chapter 11 Current Liabilities

  2. Defining Liabilities C 1

  3. Long-Term Liabilities Expected to be paid within one year or the company’s operating cycle, whichever is longer. Not expected to be paid within one year or the company’s operating cycle, whichever is longer. Classifying Liabilities C 1 Current Liabilities

  4. Current and Long-Term Liabilities C 1 Current Liabilities as a Percent of Total Liabilities

  5. Uncertainty in When to Pay Uncertainty in Liabilities C 1 Uncertainty in Whom to Pay Uncertainty in How Much to Pay

  6. Known Liabilities C 2 Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable Payroll Liabilities Multi-Period Known Liabilities

  7. $6,000 × 10% = $600 Sales Taxes Payable C 2 On August 31, Harvey Norman sold goods for $6,000 that are subject to a 10% goods and services tax.

  8. Unearned Revenues C 2 On June 30, Beyonce sells $5,000,000 in tickets for eight concerts. On Oct. 31, Beyonce performs a concert. $5,000,000 / 8 = $625,000

  9. Short-Term Notes Payable P 1 A written promise to pay a specified amount on a definite future date within one year or the company’s operating cycle, whichever is longer.

  10. Note Given to ExtendCredit Period P 1 On August 23, Brady Company asks McGraw to accept $100 cash and a 60-day, 12% $500 note to replace its existing $600 Account Payable.

  11. Note Given to ExtendCredit Period P 1 On October 22, Brady pays the note plus interest to McGraw. Interest expense = $500 × 12% × (60 ÷ 360) = $10

  12. NOTE GIVEN TO BORROW FROM BANK P 1

  13. Note Given to Borrow from Bank P 1 On Sept. 30, a company borrows $2,000 from a bank at 12% interest for 60 days. On Nov. 29, the company repays the principal of the note plus interest. Interest expense = $2,000 × 12% × (60 ÷ 360) = $40

  14. An adjusting entry is required to record Interest Expense incurred to date. End-of-Period Adjustmentto Notes P 1 Note Date End of Period Maturity Date

  15. End-of-Period Adjustmentto Notes P 1 On Dec. 16, 2011, a company borrows $2,000 from a bank at 12% interest for 60 days. An adjusting entry is needed on December 31. On Feb. 14, 2012, the company repays this principal and interest on the note.

  16. Employers incur expenses andliabilities fromhaving employees. Payroll Liabilities P 2

  17. Recording Employee Payroll Deductions P 2 An entry to record payroll expenses and deductions for an employee in Singapore might look like this.

  18. Multi-Period Known Liabilities C 2 Includes Unearned Revenues and Notes Payable Notes Payable often extend over more than one accounting period. A three-year note would be classified as a current liability for one year and a long-term liability for two years. Unearned Revenues from magazine subscriptions often cover more than one accounting period. A portion of the earned revenue is recognized each period and the Unearned Revenue account is reduced.

  19. An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated. Estimated Liabilities P 4

  20. Warranty Liabilities P 4 Seller’s obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. To comply with the full disclosure and matching principles, the seller reports expected warranty expense in the period when revenue from the sale is reported.

  21. Warranty Liabilities P 4 On Dec. 1, 2011, a dealer sells a car for $16,000 with a maximum one-year or 12,000 mile warranty covering parts. Past experience indicates warranty expenses average 4% of a car’s selling price. On Jan. 9, 2012, the customer returns the car for repairs. The dealer replaces parts costing $200.

  22. Accounting forContingent Liabilities C 3

  23. PossibleContingent Liabilities C 3 Potential Legal Claims– A potential claim is recorded if the amount can be reasonably estimated and payment for damages is probable. Debt Guarantees– The guarantor usually discloses the guarantee in its financial statement notes. If it is probable that the debtor will default, the guarantor should record and report the guarantee as a liability.

  24. Times Interest Earned A 1 Income before interestand income taxes Times interestearned = Interest expense If income before interest and taxes varies greatly from year to year, fixed interest charges can increase the risk that an owner will not earn a positive return and be unable to pay interest charges.

  25. End of Chapter 11