Class Notes 10/25 Wednesday, August 24, 2016 9:17 PM Chapter 8: Current Liabilities & Contingencies Class will cover: Not Specified Iclicker 2 Question Which of the following sets of factors is needed to calculate depreciation We also discuss several other topics like Give an example of rounding a the decimal to it's lowest term.
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on plant and equipment? D. The estimated life of the asset, its acquisition cost, and its estimated residual value Begin review of slideshow ‐ Slide 2 (1 is the title) ❖ With assets, current meant liquid or able/expecting to liquidate within the next year or accounting cycle. Same with liabilities. Current means come due in next year or accounting cycle ❖ If someone pays for a good or service in advance of two years, it's not current ❖ When there is a note payable, there will also be interest payable/interest expense ❖ Compound journal entry ‐ more than one credit or debit, but credits still equal debits ❖ Company borrows $100,000 from bank on 10/1/13 @ 10%. Principal and interest due 10/1/14. Date Account and Explanation Debit Credit 10/1/13 Cash 100,000 Notes Payable 100,000 (Record issuance of note payable) 12/31/13 Interest Expense (3 months in 2013) 2,500 Interest Payable 2,500 Record accrual of Interest expense 10/1/14 Notes Payable 100,000 Interest Expense (9 months in 2014) 7,500 Interest Payable 2,500 Cash 110,000 (Record payment of note and interest) TOTALS 10/1/14 entry 110,000 110,000 2,500 in as Interest Payable in 2013. Cancellation of 2,500 Interest Payable in 2014 when Exam 4 Page 1 note is fully paid (principal and interest) ❖ Federal Government has businesses do their work for them. Stores are responsible for collecting appropriate sales tax and paying it in a timely fashion. If store does not collect enough sales tax, they are on the hook for the difference. Tax doesn't belong to the store End with slide 15 In Class Exercise 8‐48 ‐ Sales Tax Farrah's Furniture sold 35 couches to Angel's Inc. for $850 each plus additional sales tax of 7%. Angel's Inc. purchased these on credit. Record the journal entry to recognize the sale and related taxes due. Sale 35*$850=$29,750.00 Sales Tax $29,750.00*0.07=$2,082.50 Total Charged to Customer $29,750+$2,082.50=$31,832.50 Record the Sale: Account and Explanation Debit Credit Accounts Receivable 31,832.50 Sales Revenue 29,750 Sales Tax Payable 2,082.50 (Record the sale) Sales Tax Payable 2,082 Cash 2,082 (Pay the tax) 8‐62 ‐ Recording Various Liabilities Plymouth Electronics had the following transactions in 2014 related to liabilities: a) Purchased merchandise on credit for $80,000 Inventory 80,000 Accounts Payable 80,000 b) Year‐end wages of $40,000 were incurred but not paid. Related income taxes of $13,000 and Medicare taxes of $580 were withheld. (All employees' pay to date exceeds the maximum for Social Security so there is no withholding for that.) Wages Expense 40,000 Withholding Taxes Payable 13,580 Cash 26,420 c) Year‐end estimated income taxes payable, but unpaid, for the year were #113,6115 Income Tax Expense 113,615 Income Tax Payable 113,615 d) Sold merchandise on account for $3,636, including swales taxes of $180. Record sale only. Exam 4 Page 2 Accounts Receivable 3,636 Sales Tax Payable 180 Sales Revenue 3,456 e) Employers' share of Medicare taxes incurred were $580. Taxes will be paid at a later date. Employer Taxes Expense 580 Employer Taxes Payable 580 f) Borrowed cash under a 180 day, 8%, $155,000 note. Cash 155,000 Notes Payable 155,000 Exam 4 Page 3 Class Notes 10/27 Sunday, October 16, 2016 8:36 PM Chapter 8: Current Liabilities & Contingencies Class will cover: Not Specified Problems 60, 62, 63, 64, 66, 67, 68, 70, 71, & 72 should be worked prior to class Problems 60 & 62 worked below. The others are presented to prevent you needing to dig around in the book. The answers are in the selected solutions provided on canvas. Exercise 60 ‐ Accrued Wages Company pays hourly employees every Saturday. Weekly payroll for hourly employees is $5,000, and the hours are spread evenly from Monday through Saturday. During the current year, Dec. 31 falls on a Wednesday. Required: Given this info, determine adjusting entry Company must make on 12/31. Weekly payroll divided by days in week = $5,000/6=$833.33 = Daily Payroll Daily payroll multiplied by 3 days (M,T,W) = $833.33*3=$2,499.99 = Current year accrued wages OR: Weekly payroll multiplied by (days paid divided by total days) = $5,000*(3/6)=$2,500.00 ****This works out more cleanly Date Account and Explanation Debit Credit 12/31 Wages Expense $2,500 Wages Payable $2,500 Exercise 62 ‐ Recording Various Liabilities ‐ This was worked in class on 10/25 Electronics Company had following transactions that produced liabilities in 2014. a) Purchased merch on credit for $80,000 (periodic inventory system). b) Unpaid owed wages at end of year are $40,000. Related income taxes of $13,000 and Medicare taxes of $580 were withheld. Employee wages are all above Soc. Sec. maximum, so only Medicare was paid. c) Year‐end estimated income taxes payable, but unpaid, for the year were $113,615. d) Sold merch. On account for $3,636, including state sales taxes of $180. (still periodic) e) Employer's share of Medicare taxes for period was $580. Taxes to be paid at a later date. f) Borrowed cash under a 180‐day, 8%, $155,000 note. Exercise 63 ‐ Reporting Liabilities Electronics company had following obligations: a) A legally enforceable claim against the business to be paid in 3 months. A guarantee given by a seller to a purchaser to repair or replace defective goods during the b) first 6 months following a sale. c) An amount payable to a bank in 10 years d) An amount to be paid next year to a different bank on a long‐term note payable. Required: Conceptual Connection: Describe how each of these items should be reported in the balance sheet. Exam 4 Page 1 Exercise 64 ‐ Accounts Payable A limo company has a 12/31 year‐end date. For that company, the following transactions occurred during the first 10 days of June: a) Purchased advertising space on credit. Total $1,950 and ad ran day of purchase. b) Purchased office supplies from office store on cred for $475 c) One of company's sales staff signed a $20,000 contract to provide exclusive limo services for a large company for remainder of the month. Commission is 10% of service revenue. Commission to be paid 7/10 (only want entry for commission) d) Received electric bill for May. Bill is $4,200 and due 6/15 e) Received bill for $970 from auto shop. Auto shop repaired 10 limos for company in late May. Payment due 6/18 Required: Prepare journal entries for the above transactions. Exercise 66 ‐ Accrued Liabilities Tile company had following entries that required adjusting at end of year: a) Company pays payroll of $180,000 every other Friday for a 2‐week period. This year the last payday is Fri., 12/26 (work week = M‐F) b) Company purchased $350,000 of tile on 6/1 with a note payable requiring 12% interest. Interest and principal due within 1 year. No payments as of 12/31. c) Company's earned income is $900,000 for year for tax purposes. Its effective tax rate is 30%. Must be paid by 4/15 of next year. Required: Prepare the adjusting journal entries to record these transactions at end of current year Exercise 67 ‐ Sales Tax Internet Company provides internet connection services to customers living in remote areas. During Feb. 2014, it billed a customer a total of $295,000 before taxes. Company also must pay following taxes on these charges: a) State sales tax of 6% b) Fed. Excise tax of 0.2% c) State use tax of 0.4% Required: Assuming Company collects these taxes from customer, what journal entry would Company make when customers pay their bills? Exercise 68 ‐ Payroll Accounting and Discussion of Labor Costs Blitzen Marketing Research paid its weekly and monthly payroll on 12/31. The following information is available about the payroll. Item Amount Monthly salaries $237,480 Hourly wages 585,000 FICA: Social Security (both employee and employer) 6.20% Medicare (both employee and employer) 1.45% Withholding for income taxes 108,500 Federal unemployment taxes 1,200 State unemployment taxes 4,000 Blitzen will pay both the employer's taxes and the taxes withheld on April 15. Required: Exam 4 Page 2 1) Prepare the journal entries to record the payroll payment and the incurrence of the associated expenses and liabilities. (Note: Round to the nearest penny.) 2) What is the employees' gross pay? What amount does Blitzen pay in excess of gross pay as a result of taxes? (Note: Provide both an absolute dollar amount and as a percentage of gross pay, rounding to two decimal places.) 3) How much is the employees' net pay as a percentage of total payroll related expenses? (Note: Round answer to two decimal places). 4) Conceptual connection: If another employee can be hired for $60,000 per year, what would be the total cost of this employee to Blitzen? Exercise 70 ‐ Recognition and Reporting of Contingent Liabilities A list of alternative accounting treatments is followed by a list of potential contingent liabilities. Alternative Accounting Treatments a. Estimate the amount of liability and record. b. Do not record as a liability but disclose in a footnote to the financial statements. c. Neither record as a liability nor disclose in a footnote to the financial statements. Potential Contingent Liabilities Income taxes related to revenue included in net income this year but taxable in a future year. Potential costs in future periods associated with performing warranty services on products sold this period. Estimated cost of future services under a product warranty related to past sales. Estimated cost of future services under a product warranty related to future sales. Estimated cost of pension benefits related to past employee services that has yet to be funded Potential loss on environmental cleanup suit against company; a court judgements against the company is considered less than probable but more than remotely likely Potential loss under class‐action suit by a group of customers; during the current year, the likelihood of a judgment against the company has increased from remote to possible but less than probable Potential loss under an affirmative action suit by a former employee; the likelihood of a judgment against the company is considered to be remote Potential loss from a downturn in future economic activity Loss from out‐of‐court settlement of lawsuit that is likely to occur toward the end of next year. Required: Match the appropriate alternative accounting treatment with each of the potential contingent liabilities listed above. Exercise 71 ‐ Warranties Ed's Athletics sells bicycles and other sports and athletic equipment. Sales and expected warranty claims for the year are as follows: Item Unit Sales Expected Warranty Claims for Warranty Period Cost Per Claim Mountain bikes 300 3 claims per 100 sold $30 racing bikes 120 1 claim per 20 sold 75 snowboards 650 2 claims per 100 sold 20 Exam 4 Page 3 Required: 1) Prepare the entry to record warranty expense for Ed's for the year. 2) Conceptual Connection: Why does Ed's have to record a liability for future warranty claims? Exercise 72 ‐ Ratio Analysis Intel Corporation provided the following information on its balance sheet and statement of cash flows: Current liabilities $8,514,000,000 Inventories $ 4,314,000,000 Cash and equivalents 6,598,000,000 Other current assets 2,146,000,000 Marketable securities 3,404,000,000 Cash flows from operating activities Receivables 2,709,000,000 Required: 10,620,000,000 1) Calculate the (a) current ratio, (b) quick ratio, (c) cash ratio, and (d) operating cash flow ratio. (Note: Round answers to two decimal places) 2) Conceptual Connection: Interpret these results 3) Conceptual Connection: Assume that Intel, as a requirement of one of its loans, must maintain a current ratio of at least 2.30. Given the large amount of cash, how could Intel accomplish this on 12/31 (be specific as to dollar amounts). Begin Class Review on Board Accounting Equation Assets = Liabilities + Stockholders' Equity Assets Liabilities Stockholders' Equity Resources Current obligations Ownership (Paid‐in capital) Long‐Term Obligations Ownership (Retained Earnings) Is it better to have obligations or equity on the right side of the equation? Ownership ‐ be choosy. You have to share with these people (less for you in good times), but it's not an obligation and can be a great relationship. Liabilities ‐ this is something you owe to someone and they have a claim regardless of the situation, but when you pay it off, you don't owe them anymore. It's over. You don't have to share the good times. The question is a landmine. Begin Slideshow Review ‐ Slide 15 ❖ Payroll taxes require a double entry ❖ This is looking at Liabilities, not expenses. So while you recognize interest incurred on a loan in the correct period for expenses, the interest payable could still be long‐term debt (Balance Sheet vs. Income Statement again, like assets) Iclicker 2 ‐ Taxes Payable Moore Company has the following info for the pay period of 12/15‐31,2012 Salaries $18,000 State income tax 2,160 Federal income tax 2,700 FICA 1,017 Exam 4 Page 4 1) On 12/31, salaries are paid? What amount of Salaries Expense is recorded? $18,000 2) What is the total amount of payroll checks written (credited to cash)? $12,123 ❖ Contingent Liabilities ‐ if you aren't sure which way decision of lawsuit will go and how much you may end up having to pay, you give a head's up in the notes to the financial statement. If you have a number, record it in the statement End with Slide 24 (Recording Warranty Liabilities) In Class Exercise Exercise 8‐57 ‐ Warranties (Adapted) Wally's Party Warehouse provides wholesale party equipment and materials to Party Shops. In 2013, Wally's sold 30 bounce houses at $30,000 each. The bounce houses carry a 3‐year warranty for defects. Wally's estimates that repair costs will average 2% of the total selling price. a) Record the warranty liability for 2013 Warranty Expense 18,000 Warranty Liability 18,000 b) If actual claims of $19,000 were incurred on the above items sold, what journal entry would be required? Warranty liability 19,000 Cash 19,000 c) If the beginning balance in the Estimated Warranty Liability account is $26,000, what is the ending balance at the end of 2013? (after above entries) Warranty Liability | 26,000 19,000 | 18,000 | 25,000 Back to slideshow ‐ Slide 25 ❖ Liquidity and current ‐ expect to be turned into cash within an accounting cycle or year, whichever is longer ❖ ***RATIO*** Current Ratio = Current Assets divided by Current Liabilities Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities WANT this ratio to be greater than 1!!! In Class Exercise Exercise 8‐59 ‐ Current Ratio ‐ Liquidity SJM's financial statements contain the following Information Assets Liabilities Cash $2,725,000 Accounts Payable 3,275,000 Accounts Receivable 3,050,000 Accrued Expenses 1,700,000 Inventory 3,950,000 Marketable Securities 1,725,000 Long‐Term Debt 9,100,000 Current Long‐term Current Assets Total = 2,725,000+3,050,000+3,950,000+1,725,000=$11,450,000 What is SJM's current ratio? Current Assets / Current Liabilities 11,450,000/4,975,000=2.3015 Exam 4 Page 5 Working Capital = CA ‐ CL = $6,475,000 Evaluate liquidity: Depends on many things. How liquid is the inventory in reality. If it's slow‐moving, it's not so great. Otherwise looking pretty good except the cash ratio is low and they may have trouble meeting obligations. Exam 4 Page 6