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chapter 10 synchro

chapter 10 synchro - Ch 10 Synchronotes for...

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Ch. 10 - p. 1 Ch. 10 Synchronotes for Fundamentals of Financial Accounting, 3e by Phillips/Libby/Libby Chapter 10 Reporting and Interpreting Liabilities The Role of Liabilities Liabilities are created when a company: 1. Buys goods and services on credit 2. Obtains short-term loans 3. Issues long-term debt Current liabilities are short-term obligations that will be paid with current assets within the company’s current operating cycle or within one year of the balance sheet date, whichever is longer. The liability section of the General Mills 2007 and 2008 comparative balance sheets.
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Ch. 10 - p. 7 Measuring Liabilities Initial amount of the liability –> Cash equivalent Additional liability amounts –> Increase liability Payments made –> Decrease liability Current Liabilities Accounts Payable is increased (credited) when a company receives goods or services on credit, and it is decreased (debited) when the company pays on its account. Accounts Payable is interest free unless it becomes overdue. Accrued liabilities - liabilities that have been incurred but not yet paid Accrued Payroll Payroll deductions are either required by law or voluntarily requested by employees and create a current liability for the company. Examples include: 1. Income tax 2. FICA tax 3. Other deductions (charitable donations, union dues, etc.)
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Ch. 10 - p. 7 Adam Palmer earned gross pay of $600 in the current payroll period. General Mills withheld $58 in Federal income taxes, $48.80 for FICA, and $10 for United Way, resulting in net pay of $483.20. Employer Payroll Taxes: Employers have other liabilities related to payroll. 1. FICA tax (a “matching” contribution) 2. Federal unemployment tax 3. State unemployment tax Assume General Mills was required to contribute $16,400 for FICA, $250 for federal unemployment tax, and $1,350 for state unemployment tax.
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Ch. 10 - p. 7 Accrued Income Taxes Corporations calculate taxable income by subtracting tax-allowed expenses from revenues. This taxable income is then multiplied by a tax rate, which for most large corporations is about 35 percent. General Mill calculated taxable income to be $1,000,000, and is subject to a 35% tax rate, so income taxes owed are $350,000 ($1,000,000 × 35%) Notes Payable Four key events occur with any note payable: 1. establishing the note, 2. accruing interest incurred but not paid, 3. recording interest paid 4. recording principal paid.
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Ch. 10 - p. 7 1. Establish the note on November 1, 2009. Assume that on November 1, 2009, General Mills borrowed $100,000 cash on a one-year note that required General Mills to pay 6 percent interest and $100,000 principal, both on October 31, 2010. 2. Accrue interest owed but not paid on December 31, 2009. $100,000 × 6% × 2/12 = $1,000 accrued interest 3. Record interest paid on October 31, 2010.
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Ch. 10 - p. 7 $100,000 × 6% × 12/12 = $6,000 interest paid 4. Record principal paid of $100,000 on October 31, 2010. Current Portion of Long-Term Debt Borrowers must report in Current Liabilities the portion of long-term debt that is due to be paid within one year.
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Ch. 10 - p. 7 Additional Current Liabilities Sales Tax Payable - Payments collected from customers at time of sale create a liability that is due to the state government.
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