Chapter 13 Current Liabilities

1. Chapter 13Current Liabilities Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

2. In this chapter… Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

3. Liabilities • Liability – a future payment of assets or services that a company is presently obligated to make as a result of a past transaction or event. • Current Liabilities – aka short-term liabilities, are obligations expected to be settled within one year of the balance sheet date or within the company’s next operating cycle, which ever is longer • Examples: Accounts payable, wages payable, unearned revenues, current portion of long-term debt • Long-term Liabilities – obligations expected to be paid in over one year or longer than one operating cycle Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

4. Current Portion of Long-term Debt • The current portion of long-term debt is the part of long-term debt that is due within the longer of one year of the balance sheet date or the next operating cycle. • It is reported as a current liability • The rest of the debt is reported as Long-term Liability • Note that the amounts shown as both current and long-term liabilities are principal amounts only • Interest is recorded as interest payable for any interest that has accrued to the point when statements are drawn up. • Demand loans are loans that could be called by the creditor at any time • They are shown as Current Liabilities on the Balance Sheet Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

5. Determinable Liabilities • To account for a liability, the accountant needs to know • Who to pay • When to pay • How much to pay Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

6. Types of Current Liabilities • Trade Accounts Payable or Accounts Payable • These are amounts owed to suppliers from whom the company purchased raw materials or operating supplies • Example, our company purchases lumber from Beaver Lumber on net 30 terms • Since the payment is due in 30 days, it is a current liability Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

7. Types of Current Liabilities • Payroll Liabilities • As we saw in Chapter 11, payroll liabilities are amounts owing to employees for services already performed. • These may include (or will be broken out as) income taxes Payable, CPP Payable, EI Payable Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

8. Types of Current Liabilities • Provincial Sales Tax (PST) and Goods and Services Tax (GST) Payable • PST is collected on a sale to a final customer. If a business is a middle part of the distribution channel, no PST is collected • Ex (p 659): Best Furniture of Maidstone, SK sells a couch (with cost of 12000) for 16000, with 7% PST Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

9. Types of Current Liabilities • When Best Furniture remits the PST it collected, the following entry is made: • If there is any balance in the PST Payable account at the time the Balance Sheet is prepared, then it is showed as a current liability Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

10. Types of Current Liabilities • GST – GST must be collected and paid on almost every transaction • GST collected from sales goes into a GST Payable account. GST paid on purchases goes into a GST Receivable account • When the business submits its GST report, these two accounts are netted out to determine if the business must pay or can receive a GST refund. • Example, for Inventory purchase Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

11. Types of Current Liabilities • For the sale of assets • The GST T-account looks like: Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

12. Types of Current Liabilities • So the GST balance is such that there is an amount due to the Receiver General. The journal entry is then: Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

13. Types of Current Liabilities • Unearned Revenues • As we have seen before, Unearned Revenues are amounts that have been received from customers for future goods or services • Until the goods or services are provided, the amount is shown as a current liability • A good example are airplane tickets and entertainment tickets. They are purchased in advance of the company providing the service Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

14. Mid-Chapter Demonstration Problem • Try the Mid-Chapter Demo problem Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

15. Short-term Notes Payable • A short-term note payable is a promise to pay a specified amount on a date within one year of the balance sheet date. • Sometimes a company will replace an account payable amount due (which does not require interest paid) with a note payable, which does require interest paid. • Interest owed = Principal x Annual Interest Rate x No. days/365 • If a balance sheet is prepared some time after the note payable is agreed to, but before paid, then the balance sheet will show the Notes Payable as well as a separate line for Interest Payable (Exh 13.9) Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

16. Short-term Notes Payable • Lets say we take a 1 yr loan from the bank, as a Note Payable • Then, when a balance sheet is prepared on Dec 31, interest must be shown and interest expense accrued • Assuming 5% annual interest, Interest = 20000 x .05 x 180/365 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

17. Short-term Notes Payable • When the Note is finally paid off, interest is calculated again and paid • Interest for the remaining ½ year = 20000 x .05 x ½ = 500 • To pay off the Note: Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

18. Another Example • This time, we get a $15000 Note Payable at 4% due July 1 • Then, when a balance sheet is prepared on Dec 31, interest must be shown and interest expense accrued • Interest = 15000 x .04 x (29+31)/365 = 98.63 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

19. Short-term Notes Payable • When the Note is finally paid off, interest is calculated for the portion after the year end and paid • Interest for the remaining = 15000 x .04 x (31+28+31+30+31+30+1)/365 • To pay off the Note, we pay all the interest (98.63+299.18) = 397.81 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

20. Estimated Liabilities • Estimated Liability - a liability that is known, but the exact amount and time of when it is paid may not be known • Examples are Warrantees and Taxes • Warranty – an obligation of a seller to pay for replacing or repairing the product if and when it fails • To comply with the matching principle, the seller must allocate some warranty expense in the period of the product’s sale • When calculating warranty, use the costs that the company must bear to set aside warranty • A company doesn’t charge itself selling price in warranty claims Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

21. Estimated Liabilities • The exact amount to record as a warranty expense and warranty liability must be estimated, usually based on past experience. • It might be a percentage of the product’s sale price • When the customer returns for repair, the liability is used to cover some of the cash outlay required to honour the warranty. • Lets say the product is on warranty for parts only and labour is to be paid by the customer Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

22. Estimated Liabilities • Income Tax Liabilities – Income taxes are a liability until paid to the government • The liability is created when the income is earned • When the tax installment is actually paid Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD