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ACIS2115 Chapter 10 Notes

by: Shannon Cummins

ACIS2115 Chapter 10 Notes ACIS 2115

Shannon Cummins
Virginia Tech
GPA 3.34

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About this Document

Discusses liabilities and how to journalize them. Includes notes payable, sales taxes payable, and wages payable. Also talks about bonds and how to record their issuance and collection. Lastly, ...
intro to accounting
Class Notes
ACIS2115, chapter 10, Accounting, liabilities, long-term, current, payable, liquidity, solvency, notes, sales, Taxes, wages
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This 6 page Class Notes was uploaded by Shannon Cummins on Friday April 15, 2016. The Class Notes belongs to ACIS 2115 at Virginia Polytechnic Institute and State University taught by in Spring 2015. Since its upload, it has received 21 views. For similar materials see intro to accounting in Accounting at Virginia Polytechnic Institute and State University.

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Date Created: 04/15/16
Chapter 10 Notes: Liabilities: “Creditors’ claims on total assets” and “existing debts and obligations.” Current liability - a debt that a company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer; notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest.  Notes payable – an obligation in the form of a written note; usually require the borrower to pay interest. Sept.       Cash 100,000   1       Notes Payable   100,000   (To record issuance of 6%, 4­month note to First National Bank)     Dec.  Interest Expense 2,000   31       Interest Payable   2,000 (To accrue interest for 4 months on First National Bank note)       Jan.   1 Notes Payable 100,000    Interest Payable 2,000         Cash   102,000 (To record payment of First National Bank interest­bearing note    and accrued interest at maturity)      Sales taxes payable: most state laws require that a company records sales taxes and revenue separately.             Mar. 15  Cash 11,800     Sales Revenue   11,000   Sales Taxes Payable   800   (To record daily sales and sales taxes)     o If a company did not record sales taxes and revenue separately, divide cash by 1 + sales tax rate to get sales revenue. Subtract revenue from cash income to get monetary sales tax.  Unearned revenue: is some instances, a company receives money before the service is performed. This revenue is called unearned revenue. Sep. 16  Cash 500,000     Unearned Ticket Revenue   500,000   (To record sale of 10,000 season tickets $500,000)     Oct. 27  Unearned Ticket Revenue 250,000     Ticket Revenue   250,000   (To record $250,000 of football ticket revenues)      Payroll and payroll taxes payable Mar.  Salaries and Wages Expense 100,000  7   FICA Taxes Payable   7,650   Federal Income Taxes Payable   21,864   State Income Taxes Payable   2,922   Salaries and Wages Payable   67,564   (To record payroll and withholding taxes for the week ending    March 7) Mar. 7 Salaries and Wages Payable 67,564     Cash   67,564   (To record payment of the March 7 payroll) Mar. 7 Payroll Tax Expense 13,850     FICA Taxes Payable   7,650   Federal Unemployment Taxes Payable   800   State Unemployment Taxes Payable   5,400   (To record employer's payroll taxes on March 7 payroll)     Long-term liability – obligations that a company expects to pay more than one year in the future. Bond – a form of interest-bearing note payable that is sold in small denominations.  Secured v. unsecured: o Secured bond – bonds that have specific assets of the issuer pledged as collateral. o Unsecured bond – bonds issued against the general credit of the borrower.  Convertible v. callable bonds: o Convertible bond – bonds that can be converted into common stock at the bondholder’s option. o Callable bond – bonds that the issuer can redeem at stated dollar amount prior to maturity. Time value of money – the relationship between time and money; a dollar received today is worth more than a dollar promised at some point in the future. The current market price (face value) of a bond is a function of three factors: (1) the dollar amounts to be received, (2) the length of time until the amounts are received, and (3) the market interest rate. When the contractual interest rate and the market interest rate are the same, bonds sell for face value:                Jan. 1Cash 100,000     Bonds Payable   100,000   (To record sale of bonds at face value)                  Dec. 31 Interest Expense 10,000     Interest Payable   10,000   (To accrue bond interest)                  Jan. 1 Interest Payable 10,000     Cash   10,000   (To record payment of bond interest)     When the market interest rate is higher than the contractual interest rate, the bond will sell for less than face value (a discount). The discount is a contra account, not an asset.                Jan.  1 Cash 98,000     Discount on Bonds Payable 2,000     Bonds Payable   100,000   (To record sale of bonds at a discount)   However, if the market interest rate is lower than the contractual interest rate, the bond will sell for more than face value (a premium).                 Jan. 1 Cash 102,000   Bonds Payable   100,000   Premium on Bonds Payable   2,000   (To record sale of bonds at a premium)     Redeeming bonds at maturity:  At maturity, book value will always equal face value.              Bonds Payable 100,000                Cash   100,000              (To record redemption of bonds at maturity)     Redeeming bonds before maturity:              Jan. 1 Bonds Payable 100,000     Premium on Bonds Payable 400     Loss on Bond Redemption 2,600     Cash   103,000   (To record redemption of bonds at 103)     Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.  Current ratio = current assets / current liabilities Solvency ratios measure the ability of a company to survive over a long period of time.  Debt to assets ratio = total liabilities / total assets  Times interest earned = (net income + interest expense + income tax expense) / interest expense Contingencies – events with certain outcomes that may represent potential liabilities. Off-balance sheet-financing – an intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet. Operating lease – a contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor); accounted for as a rental. Capital lease - a contractual agreement allowing one party (the lessee) to use the assets of another party (the lessor); accounted for like a debt-financed purchase by the lessee.


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