Presentation on theme: "Principles of Financial Accounting, 11e"— Presentation transcript:
1 Principles of Financial Accounting, 11e Current LiabilitiesPrinciples of Financial Accounting, 11eReeve • Warren • Duchac
2 1Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable.11-4
3 Current portion of long-term debt Notes payable 1Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities.Accounts payableCurrent portion of long-term debtNotes payable
4 1Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale.
5 1Accounts Payable as a Percent of Total Current LiabilitiesExhibit 1
6 Current Portion of Long-Term Debt 1Current Portion of Long-Term DebtLong-term liabilities are often paid back in periodic payments, called installments. Installments that are due within the coming year must be classified as a current liability.
7 1The total amount of the installments due after the coming year is classified as a long-term liability.
8 1Short-Term Notes PayableA firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account.
9 1On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 × 12% × 90/360).Interest Expense appears on the income statement as an “Other Expense.”
10 1On May 1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.
12 1Accounts Payable 10,000Notes Payable 10,000Description Debit CreditBowden Co. (Borrower)Notes Receivable 10,000Accounts Receivable 10,000Coker Co. (Creditor)Description Debit CreditOn May 31, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.
13 1Notes Payable 10,000Interest Expense 200Cash 10,200Description Debit CreditBowden Co. (Borrower)Cash 10,200Interest Revenue 200Notes Receivable 10,000Coker Co. (Creditor)Description Debit CreditOn July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 × 12% × 60/360.
14 1On September 19, Iceburg Company issues a $4,000, 90-day, 15% note to First National Bank.
15 1On the due date of the note (December 18), Iceburg Company owes $4,000 plus interest of $150 ($4,000 × 15% × 90/360).
16 1Discounting a NoteA discounted note has the following characteristics:The creditor (lender) requires an interest rate, called the discount rate.Interest, called the discount, is computed on the face amount of the note.The debtor (borrower) receives the face amount of the note less the discount, called the proceeds.The debtor pays the face amount of the note on the due date.
17 1On August 10, Cary Company issues a $20,000, 90-day note to Rock Company in exchange for inventory. Rock discounts the note at 15%.ProceedsDiscount: $20,000 × .15 × 90/360Discount rate
18 The amount paid is the face amount of the note. 1On November 8 the note is paid in full.The amount paid is the face amount of the note.
19 1 Example Exercise 11-1 Example Exercise 10-2 Follow My Example 11-1 Proceeds from Notes PayableOn July 1, Bella Salon Company issued a 60-day note with a face amount of $60,000 to Delilah Hair Product Company for merchandise inventory.Determine the proceeds of the note, assuming the note carries an interest rate of 6%.Determine the proceeds of the note, assuming the note is discounted at 6%.Follow My Example 6-1Follow My Example 11-1a. $60,000b. $59,400 [$60,000 – ($60,000 × 6% × 60/360)]11-21For Practice: PE 11-1A, PE 11-1B
20 5Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.11-79
21 Contingent Liabilities 5Contingent LiabilitiesSome liabilities may arise from past transactions if certain events occur in the future. These potential obligations are called contingent liabilities.
22 Likelihood of occurring: Probable, reasonably possible, or remote. 5The accounting for contingent liabilities depends on the following two factors:Likelihood of occurring: Probable, reasonably possible, or remote.Measurement: Estimable or not estimable.
23 Recording Contingent Liabilities 5Recording Contingent LiabilitiesDuring June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty period.
24 5If a customer required a $200 part replacement on August 16, the entry would be:
25 5 Example Exercise 10-2 Example Exercise 11-7 Estimated Warranty LiabilityCook-Rite Inc. sold $140,000 of kitchen appliances during August under a 6 month warranty. The cost to repair defects under the warranty is estimated at 6% of the sales price. On September 11, a customer required a $200 part replacement, plus $90 labor under the warranty.Provide the journal entries for (a) the estimated warranty expense on August 31 and (b) the September 11 warranty work.11-85
26 5 Follow My Example 11-7 a. Product Warranty Expense………………… 8,400 Example Exercise 11-7 (continued)5Follow My Example 11-7a. Product Warranty Expense………………… 8,400Product Warranty Payable…………….. 8,400To record warranty expensefor August, 6% × $140,000.b. Product Warranty Payable…………………. 290Supplies…………………………………… 200Wages Payable…………………………… 90Replaced defective part underwarranty.For Practice: PE 11-7A, PE11-7B11-86
27 5Quick RatioNoble Co. Hart Co.Quick assets:Cash $147,000 $120,000Accounts receivable (net) 84, ,000Total quick assets $231,000 $592,000Current liabilities $220,000 $740,000Quick assetsCurrent liabilitiesQuick Ratio =The quick ratio or acid-test ratio can be used to evaluate a firm’s ability to pay its current liabilities within a short period of time.