© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Reporting and Analyzing Current Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-2 Exh. 9.1 PastPresentFuture From a past event......for future sacrifices....comes a present obligation... Characteristics of Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-3 Current Liabilities Due within one year or the company’s operating cycle, whichever is longer. Long-Term Liabilities Due after one year or the company’s operating cycle, whichever is longer. Classifying Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-4 Exh. 9.2 Current and Long-Term Liabilities $0

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-5 Who to pay? When to pay?How much to pay? Uncertainty in Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-6 Accounts Payable Sales Taxes Payable Unearned Revenues Notes Payable Notes Payable Known (Determinable) Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-7 On June 10, 2002, JJ’s Catering received $1,500 in advance for catering a party on July 4, Prepare the entry for June 10, Unearned Revenues

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-8 On June 10, 2002, JJ’s Catering received $1,500 in advance for catering a party on July 4, Prepare the entry for June 10, Unearned Revenues

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-9 On July 4, 2002, JJ’s Catering provided the catering services for the party. Prepare the entry for July 4, Unearned Revenues

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-10 On July 4, 2002, JJ’s Catering provided the catering services for the party. Prepare the entry for July 4, Unearned Revenues

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-11 On August 15, 2002, Neeley Co. exchanged a $500 account payable with JJ’s Catering for a 60-day, 12%, $500 note payable. Prepare the August 15 entry for Neeley Co. Note Given to Extend Credit Period

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-12 On August 15, 2002, Neeley Co. exchanged a $500 account payable with JJ’s Catering for a 60-day, 12%, $500 note payable. Prepare the August 15 entry for Neeley Co. Note Given to Extend Credit Period

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-13 On October 14, 2002, Neeley Co. pays the note and interest to JJ’s Catering. Prepare the October 14 entry for Neeley Co. Note Given to Extend Credit Period

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-14 $500  12%  60 / 360 = $10 On October 14, 2002, Neeley Co. pays the note and interest to JJ’s Catering. Prepare the October 14 entry for Neeley Co. Note Given to Extend Credit Period

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-15 Cash Received Equals Face Value Face Value Equals Amount Borrowed Cash Received Is Less Than Face Value Face Value Equals Amount Borrowed Plus Interest Note Given to Borrow from Bank

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-16 Exh. 9.3 Face Value Equals Amount Borrowed PROMISSORY NOTE Face Value Date after date promise to pay to the order of National Bank Boston, MA Dollars plus interest at the annual rate of. PROMISSORY NOTE Face Value Date after date promise to pay to the order of National Bank Boston, MA Dollars plus interest at the annual rate of. $2,000Sept. 30, 2002 Sixty daysI Two thousand and no/ % Janet Lee

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-17 On September 30, 2002, Janet Lee would make the following entry. What entry would she make on the maturity date of the note? Face Value Equals Amount Borrowed

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-18 On the maturity date of the note (Nov. 29), Janet Lee would make the following entry. $2,000  12%  60 / 360 = $40 Face Value Equals Amount Borrowed

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-19 PROMISSORY NOTE Face Value Date after date promise to pay to the order of National Bank Boston, MA Dollars. PROMISSORY NOTE Face Value Date after date promise to pay to the order of National Bank Boston, MA Dollars. $2,040Sept. 30, 2002 Sixty daysI Two thousand forty and no/ Janet Lee Exh. 9.4 Face Value Equals Amount Borrowed plus Interest

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-20 On September 30, 2002, Janet Lee received $2,000 from the bank so she would make the following entry. Contra-liability Face Value Equals Amount Borrowed plus Interest

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-21 Partial Balance Sheet September 30, 2002 Net amount borrowed What entry would Janet Lee make on the maturity date of the note? Face Value Equals Amount Borrowed plus Interest

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-22 On the maturity date of the note (Nov. 29), Janet Lee would pay off the note and recognize interest expense. Face Value Equals Amount Borrowed plus Interest

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-23 Note Date End of Period Maturity Date An adjusting entry is required to record Interest Expense incurred to date. End-of-Period Adjustment to Notes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-24 Dec. 16, 2002 Dec. 31, 2002 Feb. 14, 2003 Janet Lee borrowed $2,000 on Dec. 16, 2002, by signing a 12%, 60-day note payable. Note Date End of Period Maturity Date End-of-Period Adjustment to Notes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-25 On December 16, 2002, Janet Lee would make the following entry. What entry would she make on December 31, 2002? End-of-Period Adjustment to Notes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-26 On December 31, 2002, Janet Lee would make the following entry. $2,000  12%  15 / 360 = $10 End-of-Period Adjustment to Notes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-27 On February 14, 2003, Janet Lee would make the following entry. $2,000  12%  45 / 360 = $30 End-of-Period Adjustment to Notes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-28 Employers incur several expenses and liabilities from having employees. Payroll Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-29 Exh. 9.5 Payroll Deductions FICA Taxes Medicare Taxes Federal Income Tax State and Local Income Taxes Voluntary Deductions Gross Pay Net Pay

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-30 FICA Taxes Medicare Taxes 2000: 6.2% of the first $76,200 earned in the year. 2000: 1.45% of all wages earned in the year. Employers owe the FICA amount withheld from employees’ gross pay to the IRS. Employee FICA Taxes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-31 Amounts withheld depend on the employee’s earnings and the tax rates. Employers owe the income tax amounts withheld from employees’ gross pay to the appropriate government agency. Federal Income Tax State and Local Income Taxes Employee Income Tax

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-32 Amounts withheld depend on the employee’s request. Employers owe the voluntary deductions withheld from employees’ gross pay to the designated agency. Voluntary Deductions Union Dues Savings Accounts Pension Contributions Insurance Premiums Charities Employee Voluntary Deductions

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-33 The entry to record payroll expenses and deductions for an employee might look like this. $4,000 .062 = $248 $4,000 .0145 = $58 Recording Payroll Expenses and Deductions

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-34 FICA Taxes Medicare Taxes Federal and State Unemployment Taxes Employers pay amounts equal to that withheld from the employee’s gross pay. Employer Payroll Taxes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide : 6.2% on the first $7,000 of wages paid to each employee (A credit up to 5.4% is given for SUTA paid.) Federal Unemployment Tax (FUTA) 2000: Basic rate of 5.4% on the first $7,000 of wages paid to each employee (Merit ratings may lower SUTA rates.) State Unemployment Tax (SUTA) Federal and State Unemployment Taxes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-36 The entry to record the employer payroll taxes related to the employee’s salary recorded earlier might look like this. SUTA: $4,000 .054 = $216 FUTA: $4,000  ( ) = $32 FICA amounts are the same as that withheld from the employee’s gross pay. Recording Employer Payroll Taxes

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-37 An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated. Estimated Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-38 On October 1, a dealer sold a car with a 12-month warranty. Past experience indicates that the average warranty expense for this car is $200. The dealer would prepare the following entry on October 1. Estimated Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-39 On March 6, the customer brings the car in for $200 of repairs. The dealer would make the following entry. Estimated Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-40 Employer expenses for pensions or medical, dental, life and disability insurance Employer expenses for paid vacation by employees Employee Health and Pension Benefits Vacation Pay Vacation Pay Other Estimated Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-41 Corporations pay income taxes quarterly. Income Tax Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-42 Determined by applying measurement rules established by Internal Revenue Service. Taxable Income Financial Statement Income GAAP Determined by applying Generally Accepted Accounting Principles (GAAP). Deferred Income Tax Liabilities

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-43 Taxable Income Financial Statement Income  The difference between taxable income and financial statement income results in temporary differences. Deferred Income Tax Liabilities GAAP

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-44 Amount... Contingent Liabilities Potential obligation depends on a future event arising out of a past transaction or event.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-45 Estimated Long- Term Liabilities Noncurrent portion of employee benefits, warranties, deferred income taxes, etc. Contingent Long- Term Liabilities Noncurrent portion of debt related to litigation, debt guarantees, environmental assessments, etc. Long-Term Liabilities Known Long-Term Liabilities Known obligations of a business such as unearned revenue and notes payable.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-46 Times Interest Earned = Income Before Interest Expense and Income Taxes Interest Expense If income before interest 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. Exh. 9.7 Times Interest Earned When this ratio falls below 1.5 and remains at that level or lower for several periods, the default rate on liabilities increases sharply.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 9-47 End of Chapter 9