chapter 10 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 10 PowerPoint Presentation
Download Presentation
Chapter 10

Loading in 2 Seconds...

play fullscreen
1 / 69

Chapter 10 - PowerPoint PPT Presentation


  • 285 Views
  • Uploaded on

Chapter 10. Liabilities. PowerPoint Authors: Brandy Mackintosh Lindsay Heiser. Learning Objective 10-1. Explain the role of liabilities in financing a business. The Role of Liabilities. Liabilities are created when a company:. Buys goods and services on credit.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 10' - zaynah


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 10

Chapter 10

Liabilities

PowerPoint Authors:

Brandy Mackintosh

Lindsay Heiser

learning objective 10 1
Learning Objective 10-1

Explain the role of liabilities in financing a business.

the role of liabilities
The Role of Liabilities

Liabilities are created when a company:

Buys goods and services on credit

Obtains short-term loans

Issues long-term debt

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.

the role of liabilities1
The Role of Liabilities

The liability section of the General Mills 2010 and 2011 comparative balance sheets.

learning objective 10 2
Learning Objective 10-2

Explain how to account for common types of current liabilities.

measuring liabilities
Measuring Liabilities

Initial Amount of the Liability

Cash Equivalent

Increase Liability

Additional Liability Amounts

Decrease Liability

Payments Made

current liabilities
Current Liabilities

Accounts Payable

Increases(Credited)

Decreases

(Debited)

when a company receives goods or services on credit

when a company pays on its account

Accrued Liabilities

Liabilities that have been incurred but not yet paid.

accrued payroll
Accrued Payroll

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.)

Payroll Liabilities

Payroll Deductions

Employer Payroll Taxes

accrued payroll1
Accrued Payroll

Gross Pay

Payroll Deductions:

Federal Income Taxes

FICA Taxes

Other

Total Payroll Deductions

Net Pay

$ 58.00

48.80

10.00

$ 600.00

116.80

$ 483.20

accrued payroll2

Stockholders’ Equity

+

Cash (-A) -$483,200

Payroll

Expense(+E, -SE) -$600,000

FIT Withheld (+L) +$58,000

FICA Payable (+L)+$48,800

United Way (+L) +$10,000

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.

600,000

58,000

48,800

10,000

483,200

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)

Analyze

Record

Liabilities

Assets

=

1

2

accrued payroll3

Stockholders’ Equity

+

Payroll Tax

Expense (+E, -SE) -53,550

FICA Payable (+L) +48,800

FUTA Payable (+L) +750

SUTA Payable (+L) +4,000

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.

53,550

48,800

750

4,000

dr Payroll Tax Expense (+E, -SE)

cr FICA Tax Payable (+L)

cr Federal Unemployment Tax Payable (+L)

cr State Unemployment Tax Payable (+L)

Analyze

Record

Liabilities

Assets

=

1

2

accrued income taxes

Stockholders’ Equity

+

Income Tax

Expense (+E, -SE) -350,000

Income Tax

Payable (+L) +350,000

Accrued Income Taxes

Corporations calculate taxable income bysubtracting tax-allowed expenses from revenues. This taxable income is then multiplied by a tax rate, which for most large corporations is about 35 percent.

350,000

350,000

dr Income Tax Expense (+E, -SE)

cr Income Tax Payable (+L)

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%)

Analyze

Record

Liabilities

Assets

=

1

2

notes payable
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

3

2

4

notes payable1

Stockholders’ Equity

+

Cash (+A) +100,000

Notes

Payable (+L) +100,000

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.

100,000

100,000

dr Cash (+A)

cr Notes Payable (+L)

Analyze

Record

Liabilities

Assets

=

1

2

notes payable2

Stockholders’ Equity

+

Interest

Expense (+E, -SE) -1,000

Interest

Payable (+L) +1,000

Notes Payable

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

1,000

1,000

dr Interest Expense (+E, -SE)

cr Interest Payable (+L)

Analyze

Record

Liabilities

Assets

=

1

2

notes payable3

Stockholders’ Equity

+

Cash (-A) -6,000

Interest

Expense (+E, -SE) -5,000

Interest

Payable (-L) -1,000

Notes Payable

3. Record interest paid on October 31, 2013.

5,000

1,000

6,000

dr Interest Expense (+E, -SE)

dr Interest Payable (-L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

notes payable4

Stockholders’ Equity

+

Cash (-A) -100,000

Note

Payable (-L) -100,000

Notes Payable

4. Record principal paid of $100,000 on October 31, 2013.

100,000

100,000

dr Note Payable (-L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

current portion of long term debt
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.

additional current liabilities
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 .

additional current liabilities1

Stockholders’ Equity

+

Cash (+A) +1,050

Sales

Revenue (+R, +SE) +1,000

Sales Tax

Payable (+L) +50

Additional Current Liabilities

Best Buy sells a television for $1,000 cash plus 5 percent sales tax.

$1,000 × 5% = $50 sales tax collected

1,050

50

1,000

dr Cash (+A)

cr Sales Tax Payable (+L)

cr Sales Revenue (+R, +SE)

Record

Analyze

Liabilities

Assets

=

1

2

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).

additional liabilities

Stockholders’ Equity

+

Cash (+A) +8

Unearned

Revenue (+L) +8

Additional Liabilities

On May 14th 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.

8

8

dr Cash (+A)

cr Unearned Revenue (+L)

Record

Analyze

Liabilities

Assets

=

1

2

additional liabilities1

Stockholders’ Equity

+

Concert

Revenue (+R, +SE) +4

Unearned

Revenue (-L) -4

Additional Liabilities

When the February 21st 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.

4

4

dr Unearned Revenue (-L)

cr Concert Revenue (+R, +SE)

Record

Analyze

Liabilities

Assets

=

1

2

learning objective 10 3
Learning Objective 10-3

Analyze and record bond liability transactions.

long term liabilities
Long-Term Liabilities
  • Common Long-Term Liabilities
    • Long-term notes payable
    • Deferred income taxes
    • Bonds payable

Bonds are financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now.

bonds
Bonds
  • Key Elements of a Bond
      • Maturity date
      • Face value
      • Stated interest rate

$1,000

×

6%

×

= $60

12

12

Interest Computation

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.

bonds1
Bonds

Balance Sheet Reporting of Bond Liability

Relationships between Interest Rates and Bond Pricing

bonds2

Stockholders’ Equity

+

Bonds

Payable (+L)+100,000

Cash (+A) +100,000

Bonds

Bonds Issued at Face Value

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).

100,000

100,000

dr Cash (+A)

cr Bonds Payable (+L)

Record

Analyze

Liabilities

Assets

=

1

2

bonds3

Stockholders’ Equity

+

Cash (+A) +107,260

Bonds Payable (+L) +100,000

Premium on

Bonds Payable (+L) +7,260

Bonds

Bonds Issued at a Premium

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).

107,260

100,000

7,260

dr Cash (+A)

cr Bonds Payable (+L)

cr Premium on Bonds Payable (+L)

Analyze

Record

Liabilities

Assets

=

1

2

bonds4

Stockholders’ Equity

+

Cash (+A) +93,376

Bonds Payable (+L) +100,000

Discount on

Bonds Payable (+xL,-L)-6,624

Bonds

Bonds Issued at a Discount

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.

93,376

6,624

100,000

dr Cash (+A)

dr Discount on Bonds Payable (+xL, -L)

cr Bonds Payable (+L)

Analyze

Record

Liabilities

Assets

=

$100,000 - $93,376 = $6,624 discount

1

2

interest on bonds issued at face value

Stockholders’ Equity

+

Interest

Expense (+E, -SE) -500

Interest Payable (+L) +500

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.

500

500

dr Interest Expense (+E, -SE)

cr Interest Payable (+L)

Analyze

Record

Liabilities

Assets

=

$100,000 × 6% × 1/12 = $500 interest

1

2

interest on bonds issued at a premium
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 amortization

interest on bonds issued at a discount
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 amortization

bond retirement

Stockholders’ Equity

+

Cash (-A) -100,000

Bonds Payable (-L) -100,000

Bond Retirement

General Mills’ bonds were retired with a payment equal to their $100,000 face value. Let’s analyze and record this transaction.

100,000

100,000

dr Bonds Payable (-L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

bond retirement1

Stockholders’ Equity

+

Cash (-A) -102,000

Loss on Bond

Retirement(+E,-SE) -2,000

Bonds Payable (-L) -100,000

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.

100,000

2,000

102,000

dr Bonds Payable (-L)

dr Loss on Bond Retirement (+E, -SE)

cr Cash (-A)

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.

Analyze

Record

Liabilities

Assets

=

1

Cash Payment $103,000

Carrying Value 100,000

Loss on Retirement $3,000

2

learning objective 10 4
Learning Objective 10-4

Describe how to account for contingent liabilities.

contingent liabilities
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.

learning objective 10 5
Learning Objective 10-5

Calculate and interpret the quick ratio and the times interest earned ratio.

evaluate the results
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

(Cash + Short-term Investments + Accounts Receivable, Net)

Current Liabilities

Quick Ratio =

(Net Income + Interest Expense + Income Tax Expense)

Interest Expense

Times Interest

Earned Ratio

=

evaluate the results1
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.

(Cash + Short-term Investments + Accounts Receivable, Net)

Current Liabilities

Quick Ratio =

$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.

evaluate the results2
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

(Net Income + Interest Expense + Income Tax Expense)

Interest Expense

Times Interest

Earned Ratio

=

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.

chapter 10 supplement 10a

Chapter 10Supplement 10A

Straight-Line Method of Amortization

bond premium

Stockholders’ Equity

+

Cash (-A) -6,000

Interest

Expense (+E, -SE) -4,185

Premium on

Bonds Payable (-L) -1,815

Bond Premium

Cash Interest $6,000

Amortization of Premium (1,815)

Interest Expense $4,185

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 ofamortization 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).

4,185

1,815

6,000

dr Interest Expense (+E, -SE)

dr Premium on Bonds Payable (-L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

bond premium1
Bond Premium

Amortization Schedule of Bonds Issued at a Premium

$7,260 - $1,815 = $5,445

$7,260 ÷ 4 = $1,815

$107,260 – $1,815 = $105,445

$100,000 × 6% × 12/12 = $6,000

$6,000 - $1,815 = $4,185

Notice that each of these amounts would plot as a straight-line!

bond discount

Stockholders’ Equity

+

Cash (-A) -6,000

Discount on

Bonds Payable(-xL,+L)+1,656

Interest

Expense (+E, -SE) -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).

7,656

1,656

6,000

dr Interest Expense (+E, -SE)

cr Discount on Bonds Payable (-xL, +L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

Cash Interest $6,000

Amortization of Discount 1,656

Interest Expense $7,656

2

bond discount1
Bond Discount

Amortization Schedule of Bonds Issued at a Discount

$6,624 - $1,656 = $4,968

$6,624 ÷ 4 = $1,656

$93,376 + $1,656 = $95,032

$100,000 × 6% × 12/12 = $6,000

$6,000 + $1,656 = $7,656

chapter 10 supplement 10b

Chapter 10Supplement 10B

Effective-Interest Method of Amortization

effective interest amortization

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.

Interest (I) = Principal (P) × Rate (R) × Time (T)

Interest Expense = Carrying Value × Market Rate × n/12

$4,290 = $107,260 × 4% × 12/12

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.

effective interest amortization1

Stockholders’ Equity

+

Cash (-A) -6,000

Interest

Expense (+E, -SE) -4,290

Premium on

Bonds Payable (-L) -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.

4,290

1,710

6,000

dr Interest Expense (+E, -SE)

dr Premium on Bonds Payable (-L)

cr Cash (-A)

Cash Interest $ 6,000

Effective Interest 4,290

Amortization of Premium $1,710

Interest (I) = Principal (P) × Rate (R) × Time (T)

Interest Expense = Carrying Value × Market Rate × n/12

$4,290 = $107,260 × 4% × 12/12

Analyze

Record

Liabilities

Assets

=

1

2

effective interest amortization2
Effective Interest Amortization

$6,000 - $4,290 = $1,710

$7,260 - $1,710 = $5,550

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

Interest Expense decreases and Premium Amortizationincreases each period. Cash interest is unchanged.

effective interest amortization3

Stockholders’ Equity

+

Cash (-A) -6,000

Discount on

Bonds Payable(-xL,+L)+1,470

Interest

Expense (+E, -SE) -7,470

Effective Interest Amortization

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.

7,470

1,470

6,000

dr Interest Expense (+E, -SE)

cr Discount on Bonds Payable (-L)

cr Cash (-A)

Interest (I) = Principal (P) × Rate (R) × Time (T)

Interest Expense = Carrying Value × Market Rate × n/12

$7,470 = $93,376 × 8% × 12/12

Cash Interest $ 6,000

Effective Interest 7,470

Amortization of Discount $ 1,470

Analyze

Record

Liabilities

Assets

=

1

2

effective interest amortization4
Effective Interest Amortization

$7,470 - $6,000 = $1,470

$6,624 - $1,470 = $5,154

Effective Interest Amortization of Bonds Issued at a Discount

$93,376 × 8% × 12/12 = $7,470

$100,000 × 6% × 12/12 = $6,000

$93,376 + $1,470 = $94,846

Both Interest Expense and Discount Amortizationincrease each period. Cash interest is unchanged.

chapter 10 supplement 10c

Chapter 10Supplement 10C

Simplified Effective-Interest Amortization

accounting for bond issue
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.

bond premium2

Stockholders’ Equity

+

Cash (-A) -6,000

Interest

Expense (+E, -SE) -4,290

Bonds

Payable, Net (-L) -1,710

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

4,290

1,710

6,000

dr Interest Expense (+E, -SE)

dr Bonds Payable, Net (-L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

bond discount2

Stockholders’ Equity

+

Cash (-A) -6,000

Interest

Expense (+E, -SE) -7,470

Bonds

Payable, Net (+L) -1,470

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

7,470

1,470

6,000

dr Interest Expense (+E, -SE)

cr Bonds Payable, Net (+L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

chapter 10 solved exercises

Chapter 10Solved Exercises

M10-5, E10-2, E10-3, E10-8, E10-10, PA10-3

slide57

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.

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

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.

6,000,000

80,000

6,000,000

80,000

160,000

6,240,000

6,000,000

80,000

dr Cash (+A)

cr Note Payable (+L)

dr Interest Expense (+E, -SE)

cr Interest Payable (+L)

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)

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.

slide60

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

E10-3 Recording Payroll Costs with Discussion

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

March 31, 2013

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, 2013

Req. 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.

slide62

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

E10-8 Preparing Journal Entries to Record Issuance of Bonds at Face Value, Payment of Interest, and Early Retirement

Req. 1

dr Cash (+A) 200,000

cr Bonds Payable (+L) 200,000

Req. 2

dr Interest Expense (+E, -SE) 12,000

cr Cash (-A) 12,000

($200,000 x 6% x 12/12) = $12,000

Req. 3

dr Bonds Payable (-L) 200,000

dr Loss on Bonds Retired (+E, -SE) 2,000

cr Cash (-A) 202,000

($200,000 x 101%) = $202,000

slide64

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

E10-10 Calculating and Interpreting the Quick Ratio and Times Interest Earned Ratio

Req. 1

$2,481 + $6,539

$15,660

$2,101 + $5,197

$11,491

2010 = = 0.58

2009 = = 0.64

Req. 2

2010 = ($4,114 + $ 2,024 + $1,147) ÷ $2,024 = 3.60

2009 = ($3,021 + $ 1,237 + $1,136) ÷ $1,237 = 4.36

slide66

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 ) theadjusting 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

PA10-3 Recording and Reporting Current Liabilities

Req. 1

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) 63,000

dr 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:

Req. 2

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).

slide68

PA10-3 Recording and Reporting Current Liabilities

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