ch10 - CHAPTER 10 Reporting and Analyzing Liabilities...

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CHAPTER 10 Reporting and Analyzing Liabilities CHAPTER OVERVIEW Chapter 10 discusses the two basic types of liabilities, current and long-term. In the former category you will learn about notes payable, sales taxes payable, payroll taxes payable, unearned revenues, and current maturities of long-term debt. In the latter category you will learn about bonds: their issuance, payment of interest and amortization of discount or premium (using both straight-line and effective-interest methods), and their redemption. You will also learn about long-term notes. For both categories you will learn about financial statement presentation and analysis. Finally, you will learn about off-balance-sheet financing. REVIEW OF SPECIFIC STUDY OBJECTIVES SO1. Explain a current liability and identify the major types of current liabilities. ¿ A current liability is a debt that can reasonably be expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer . A debt that does not meet both criteria is a long-term liability. ¿ Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest . All material current liabilities should be reported on the balance sheet.
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Tools for Business Decision Making 10-2 SO2. Describe the accounting for notes payable. ¿ Notes payable are obligations in the form of written notes . They give written documentation of a liability and usually require the borrower to pay interest. If a note is due for payment within one year of the balance sheet, then it is classified as a current liability. ¿ Consider the following example . Robinson Company borrows $20,000 and issues a 3-month, 12% note on May 1. The entry on May 1 is: Cash 20,000 Notes Payable 20,000 (To record issuance of note) If Robinson prepares financial statements on June 30 , necessitating adjusting entries, then the adjusting entry for accrued interest is: Interest Expense 400 Interest Payable 400 (To record accrued interest: $20,000 X .12 X 2/12) On the maturity date, August 1 , the following entry is recorded: Notes Payable 20,000 Interest Payable 400 Interest Expense 200 Cash 20,600 (To record payment of note plus interest) Total interest on the note is $600, and the maturity value is $20,600. The Interest Payable of $400 must be taken off the books since it is no longer payable, and the Interest Expense is the third month's interest ($20,000 X .12 X 1/12). SO3. Explain the accounting for other current liabilities. ¿ There are usually sales taxes on items sold . The retailer serves as a collection agent for the taxing authority, usually the state, and must periodically remit to the state the sales taxes collected. Under most state laws, when an item is sold, the amount of the sale and the amount of the sales tax must be rung up separately on the cash register . If $500 of merchandise is sold, and the sales tax percentage is 6%, then the following
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ch10 - CHAPTER 10 Reporting and Analyzing Liabilities...

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