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AU / Accounting / ACCT 2110 / When is a liability considered current?

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
30 Pages 239 Views 1 Unlocks
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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        ⎭

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