When is a liability considered current?
When is a liability considered current?
Description
School: Auburn University
Department: Accounting
Course: Principles of Financial Accounting
Professor: Elizabeth miller
Term: Fall 2015
Tags:
Cost: 50
Name: ACCT2110 Exam 4 Study Guide
Description: Chapters 8 and 9 - Current and contingent liabilities, long-term liabilities, bonds, and certificates.
Uploaded: 04/14/2017
Reviews
Chapter 8: Current and Contingent LiabilitiesWe also discuss several other topics like What is the difference between HTML format and display format?
Liabilities
- Obligation, something you have to pay
- Probable future sacrifice of economic benefits
- Represent creditors’ claims assets
- Contingent liabilities may or may not actually become liabilities - they depend on a future outcome
- Future outcome must be probable and estimable
Don't forget about the age old question of astronomy 101 exam 2
• A liability is considered current if it’s due within the operating cycle - usually a year
It must be reasonably expected to be covered by a current asset or a current liability We also discuss several other topics like What are are subjective experiences that consist of physiological arousal and cognitive appraisal?
(reclassifying liability accounts)If you want to learn more check out Why Women Aren't Welcome on the Internet?
If both criteria are not met, it's considered long-term
Current Accounts include: Accounts Payable, Notes Payable, Taxes Payable, unearned
revenue or other accrued liabilitiesIf you want to learn more check out What is the evidence for climate change?
- Accounts Payable
- Has terms
- Goods / services purchased on credit
- Usually 30-60 days
- Seldomly require interest payments
- Don't require a formal contract
- Notes Payable
- Can be current or long term
- Current if due within the year
- Usually require interest to be paid
- Legal document / agreement ← formal debt instrument
- Can occur when A/P cannot be met
Form of reclassifying a liabilityWe also discuss several other topics like What were the precursors to the prokaryotic cells and hence the life on planet earth?
Interest = Face value rate
Principal X (assumed annual) X Time
Value
To Record a note:
Borrowed $30,000 at 8% for 6 months
Cash $30,000 (issued)
Notes Payable $30,000
30,000 x 0.08 x (6/12) = 1,200
Notes Payable $30,000
Interest Expense 1,200 (payment)
Cash $31,200
If not within calendar year:
Borrowed $100,000 10/1/13 at 10% due 10/1/14
2013
Oct 1 Cash $100,000 Initial Borrowing
Notes Payable $100,000
$100,000 x 0.10 x 3/12
2500
2013
Dec 31 Interest Expense $2,500
Interest Payable $2,500 change expense to liability to
balance end of year
2014
Oct 1 Notes Payable $100,000 100,000 x 0.10 x 9/12
Interest Expense 7,500 rest of year 7,500
Interest Payable 2,500 close temp account
Cash $110,000
To convert Accounts Payable to Note Payable you need a journal entry-just shows zeroing one account and opening another
Accounts Payable 25,000 empties +- account
Notes Payable 25,000 establishes +- account
Keeps the balance in a liability account but changes the nature of it based on reclassification
Accrued Liabilities
Usually the completed portions of current processes
Think unearned revenue
Originate from adjusting entries
This is what we did to balance interest Assets=Liabilities+SE
Interest Expense Wage Expense 7,000 +7000 7000
Interest Payable Wage Payable 7,000
The accrual of liability
Reduces stockholder’s equity (expense ↑)
Decreases liability (gives it a credit)
$10,000 paid to employees Jan 3
1,000 was due as part of previous year
Jan 3 Wages Expense 3,000 current year
Wages Payable 7,000 previous year, closing exp acct
Cash 10,000
- Taxes Payable
- All taxes collected by seller
- Sales tax, usage tax, excise tax
- Immediately separated out/ not counted as income
- Usually a % of sales price
- Considered liabilities
Example:
3,000 units at $75 each 3,000 x 75 = 225,000 ⎫
7% sales tax state 225,000 x 0.07 = 15,750 ⎬
10% sales tax city 225,000 x 0.01 = 2,250 ⎭
