Chapter8 - 8-1CHAPTER 8 LIABILITIES I.Current Liabilities...

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Unformatted text preview: 8-1CHAPTER 8 LIABILITIES I.Current Liabilities II.Time value of money III.Bonds IV.Report liabilities on Financial Statements 8-2Liabilities Liabilities are obligations that an organization owes to other organizations or individuals. Examples of liabilities are: Accounts Payable, Accrued Liabilities, Notes Payable, andDeferred Revenues. Liabilities are classified on the balance sheet as current liabilities (maturity <= 1 year) and non-current liabilities (maturity > 1 year). Liabilities are measured at their current cash equivalent (the amount a creditor would accept to cancel the debt) at the time incurred. 8-3Current Liabilities Classification Known amounts (e.g., notes payable) Unknown amounts (e.g., warranty payable) Current liabilities are obligations due within one year of balance sheet date 8-4Current Liabilities of Known Amount Accounts Payable Amounts owed for products and services purchased on account Short-Term Notes Payable Common form of financing; company incurs interest expense Accrued Liabilities Expense incurred, but not yet paid; often an adjusting entry!includes salaries & interest payable Sales Tax Payable Tax levied by state on retail sales; company collects from customer and remits to govt Payroll Liabilities Salaries & wages paid to employees; also includes income taxes and FICA taxes withheld Unearned revenues Customers makes payment before receiving product or service 8-5Notes Payable A note payable specifies the interest rate associated with the borrowing. lTo the lender, interest is a revenue. lTo the borrower, interest is an expense. Interest = Principal Interest Rate TimeWhen computing interest for one year, Time equals 1. When the computation period is less than one year, then Time is a fraction. 8-6An Example of Notes Payable Starbucks makes monthly financial statements. On March 1, 2007, it borrowed $100,000 from BOA for 2 months at an annual interest rate of 12%, and wrote a note promising to pay back the principal and interest in a lump sum at the end of 2 months. Make all the journal entries for this contract from Starbucks point of view. Lets first calculateInterest Expense Per Month (Principle * Annual interest rate * time) =($100,000 * 12% * 1/12) = $1,000 8-7On the day of borrowing: Answer Mar. 1Cash $100,000 Note Payable $100,000 Then, an adjusting entry on March 31: Mar. 31 Interest Expense$1,000 Interest Payable $1,000 Finally, on April 30, the end of the contract, we record: Apr. 30 Note Payable $100,000 Cash$100,000 Interest Expense$1,000 Cash$1,000 Interest Payable$1,000 Cash$1,000 8-8Current Liabilities That Are Estimated (Amounts Unknown) Estimated Warranty Payable Contingent Liabilities 8-9Estimated Warranty Payable Companies guarantee products through warranty agreements Warranty expense is estimated in same period as sale of product Matching principle JOURNALDateAccountsDebitCreditWarranty Expense$$$$Estimated Warranty Payable$$$$8-10...
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This note was uploaded on 11/27/2011 for the course ACCY 2001-17 taught by Professor Xue during the Fall '11 term at GWU.

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Chapter8 - 8-1CHAPTER 8 LIABILITIES I.Current Liabilities...

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