Chapter 9 Current Liabilities

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Chapter 9 Current Liabilities Time Value of

• Bellevue Community College
• Accounting 220
• J. Paquette

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ACCT. 210 REVIEW. . .

• Stockholders invest 35,000 in a company
• DR ____________ ______________
• CR ____________ ______________

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ACCT. 210 REVIEW. . .

• Purchased 400 Office Supplies on Credit
• DR ____________ ______________
• CR ____________ ______________

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ACCT. 210 REVIEW. . .

• Purchased 6,000 Office Equipment on for 2,500
  Cash the rest on Credit.
• DR ____________ ______________
• CR ____________ ______________

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ACCT. 210 REVIEW. . .

• Billed clients for consulting fees for Services
  performed, 4,000.
• DR ____________ ______________
• CR ____________ ______________

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ACCT. 210 REVIEW. . .

• Paid 2,200 cash for office salaries.
• DR ____________ ______________
• CR ____________ ______________

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ACCT. 210 REVIEW. . .

• Received a check for 3,000 from a client in
  payment on account for commissions billed in
  previous transaction.
• DR ____________ ______________
• CR ____________ ______________

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Adjusting Entries review ch. 34

• Revenue Recognition
• Matching Principles
  

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Accrual Basis Accounting

• Revenue recorded only when earned not when cash
  is received
• Expense recorded only when incurred not when
  cash paidin the period in which the company
  benefited from it

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Accrual Basis adheres to...

• Generally
• Accepted
• Accounting
• Principles

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Illustration 4-2
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Still confused?

• Do we need another way to learn this concept?

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Revenue Recognition a rap

• If you wanna be accrual
• Heres what you gotta do,
• When the service is performed
• You book the Revenue!

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Objectives Chapter 9

• LIABILITIES the issues (recognition, valuation,
  classification)
• Identify, compute, and record
• Understand Definite, Estimated, and
• Contingent liabilities
• Define interest

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Objectives

• KNOW SIMPLE AND COMPOUND INTEREST!

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Objectives

• Do compound interest calculations!
• Future Value
• Present Value

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Why liabilities????

• A claim on assets/services
• So you can grow. . . .
• (what for?)
• Need to manage
• cash flows

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Management Issues

• RECOGNITION
• Failure to record ? Understated expenses
• VALUATION
• CLASSIFICATION ST or LT?
• DISCLOSURE in the Notes

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The Basic Journal Entry

• DR. Expense (or Asset)
• CR. Liability
• What is the Financial Statement Impact? IS, BS,
  CF

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DEFINITE LIABILITIES

• Accounts Payable
• Bank Loans/Commercial Paper
• Lines of credit (revolving lines of credit)
• Notes Payable
• Accrued liabilities.
• Dividends payable.
• Sales and excise taxes payable--homework
• Current portions of long-term debt.
• Payroll liabilities.
• Unearned revenues

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ESTIMATED LIABILITIES

• Income Taxesknown profit x estim.
• Property Taxgovt bill after the fact
• Product Warranty
• Vacation Pay

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CONTINGENT LIABILITIES

• MUST BE
• Probable
• Reasonably estimated

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Accounts Payable

• How fast are we paying???

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Accounts Payable

• Payable Turnover in a year
• Average Days Payable

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Accrued Liabilities

• Accrued interest
• Accrued Dividends
• Sales (excise) tax
• Current portion of Long Term Debt

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Your Paycheck. . .

• POINT OF VIEW of EMPLOYER
• 1) To record the paycheck amount
• 2) To record ADDITIONAL amounts owed to taxing
  authorities

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• See handout on Payroll Taxes

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Unearned Revenues

• What are they?

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SEATTLE SuperSonics

• They sell SEASON TICKETS for 41 home games/year,
  October ?April.
• What do you do with the cash paid for the season
  ticket? (assume 100/game)
• DR. CASH 4,100
• CR. UNEARNED REVENUE 4,100

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When do you get to recognize REVENUE?

• October ?March recognize 6 games/month
• April recognize 5 games
• 6x6 months 36 (600 per month for 6 months)
• 5x1 month 5 (500 per month for 1 months)
• Total of 41 games

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P.S

• What OTHER sources of REVENUE do the Seattle
  SuperSonics have?

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Estimated Liabilities

• Income Taxesknown profit x estim.
• Property Taxgovt bill after the fact
• Product Warranty
• Vacation Pay

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Product Warranty Liability

• What is the product?
• How many need to be repaired?
• How do you estimate the repair rate?
• How long does the warranty last?
• What effect does this have on the Balance Sheet
  and Income Statement?

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Contingent Liabilities must be

• Probable
• Reasonably estimated

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Time Value of Money. . . .

• What is Simple Interest?
• You borrow 5,000
• For 2 years
• At 12
• 5000 12 600
• 5000 12 600
• 1,200 ?__________

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Time Value of Money. . . .

• What is Compound Interest?
• You borrow 5,000
• For 2 years
• At 12
• 5000 12 600
• 5600 12 672
• 1,272 ?__________

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What about Annuities?

• If I put 3000 in an account each December, what
  will it be worth in 3 years?
• We know
• Present Value 3,000
• Interest Rate 8
• Table ____
• Factor ____
• Future Value? _____

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Present Value whats it worth now?

• Single Amount Example What do I have to put
  into the bank NOW, to have 10,000 in 3 years?
  assume 8
• We know
• Present Value _____
• Interest Rate 8
• Table ____
• Factor ____
• Future Value? 10,000

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Present Value whats it worth now?

• Annuity Example "I'm making payments of 3,000
  for the next 3 years. If I chose NOT to pay on
  time, but pay in CASH, what would they charge
  me?"
• We know
• Present Value _____
• Interest Rate 8
• Table ____
• Factor ____
• Payments 3,000

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Appendix D applications -1

• Investing IDLE CASH. . . .
• Lets invest 10,000,000 for half a year at 12,
  compounded monthly.
• We know
• Present Value _____
• Interest Rate 12
• Table ____
• Factor ____
• Future Value? ______
• Payment ______

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Appendix D applications - 2

• We need to pay off a loan, worth 100,000 in five
  years, by making annual deposits into a bank
  account.
• We know
• Present Value _____
• Interest Rate 12
• Table ____
• Factor ____
• Future Value ______
• Payment ________

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Appendix D applications -3

• Gato purchased merchandise from Perro by issuing
  an 8,000 non-interest bearing note, payable in 2
  years.
• We know
• Present Value _____
• Interest Rate 9
• Table ____
• Factor ____
• Future Value 8,000
• Payment ________

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Journal Entry for this

• Buyers POV (GATO)
• Equipment (copier, etc.)
• Disc. On Note Payble
• Note Payable
• Sellers POV (PERRO)
• Notes Receivable
• Sales
• Disc. On Notes Receivable

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Appendix D applications -4

• Sam Hurst is wondering if he should buy a machine
  and how much he should pay for it. He estimate
  it will last 8 years and save him 700 of labor
  costs per year. Assume 10.
• We know
• Present Value _____
• Interest Rate 10
• Table ____
• Factor ____
• Future Value ______
• Payment 700

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Appendix D applications other

• Installment notes
• Valuing a bond
• Recording leases
• Pension obligations
• Debt
• Depreciation of PPE
• Capital expenditure decisions
• Anywhere TIME is involved. . . . .

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Summary

• AP Turnover
• Definitely determinable liabilities
• Contingent Liabilities
• Know SIMPLE COMPOUND interest
• Use Appendix D and solve time value problems

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• Review and STOP HERE!

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A Note

• A loan is made on August 31st 5,000, 12, due
  in 60 days
• August 31st To record the loan
• October 30th To record payment of the loan
• September 30th To accrue interest

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Example of Property Tax Payable

• July 31 Property Tax Expense 2,000
• Estimated Property Tax Payable 2,000
• To record estimated property tax expense
  for the month based on last years rate (bill not
  received yet)
• 24,000 / 12 months 2,000
• Nov. 30 Property Tax Expense 2,300
• Estimated Property Tax Payable 2,300
• Bill received, came in higher than last
  year. To record estimated property tax (2060)
  to catch up for 4 previous months under accrual
  (60 4)
• How much have you accrued so far?

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Example of Property Tax Payable

• Bill is due on December 15. Pay and clear out
  Liability set up Prepaid for rest of year.
• Dec. 15 Estimated Property Tax Payable
  10,300
• Prepaid Property Tax 14,420
• Cash 24,720
• Payment of property tax