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    Acc102 W4

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    Moheb Refaat
    Here are the key points about current liabilities: - Current liabilities are obligations that are due within one year or operating cycle, whichever is longer. They include notes payable, accounts payable, unearned revenues, and accrued expenses like taxes payable. - Notes payable involve borrowing money with a written promissory note that requires interest payments. Accounts payable are amounts owed to suppliers. Unearned revenues are amounts received before goods/services are provided. - Current liabilities are reported on the balance sheet with each type listed separately. Key details are disclosed in notes. - The current ratio compares current assets to current liabilities and measures a company's liquidity or ability to pay short-term

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    Acc102 W4

    Uploaded by

    Moheb Refaat
    60 views26 pages
    Here are the key points about current liabilities: - Current liabilities are obligations that are due within one year or operating cycle, whichever is longer. They include notes payable, accounts payable, unearned revenues, and accrued expenses like taxes payable. - Notes payable involve borrowing money with a written promissory note that requires interest payments. Accounts payable are amounts owed to suppliers. Unearned revenues are amounts received before goods/services are provided. - Current liabilities are reported on the balance sheet with each type listed separately. Key details are disclosed in notes. - The current ratio compares current assets to current liabilities and measures a company's liquidity or ability to pay short-term

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    ACC102_W4

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    Here are the key points about current liabilities: - Current liabilities are obligations that are due within one year or operating cycle, whichever is longer. They include notes payable, accounts payable, unearned revenues, and accrued expenses like taxes payable. - Notes payable involve borrowing money with a written promissory note that requires interest payments. Accounts payable are amounts owed to suppliers. Unearned revenues are amounts received before goods/services are provided. - Current liabilities are reported on the balance sheet with each type listed separately. Key details are disclosed in notes. - The current ratio compares current assets to current liabilities and measures a company's liquidity or ability to pay short-term

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    60 views26 pages

    Acc102 W4

    Uploaded by

    Moheb Refaat
    Here are the key points about current liabilities: - Current liabilities are obligations that are due within one year or operating cycle, whichever is longer. They include notes payable, accounts payable, unearned revenues, and accrued expenses like taxes payable. - Notes payable involve borrowing money with a written promissory note that requires interest payments. Accounts payable are amounts owed to suppliers. Unearned revenues are amounts received before goods/services are provided. - Current liabilities are reported on the balance sheet with each type listed separately. Key details are disclosed in notes. - The current ratio compares current assets to current liabilities and measures a company's liquidity or ability to pay short-term

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    You are on page 1of 26

    2022

    Spring semester

    Accounting Principles (2)

    Dr. Mohamed Mahmoud


    Chapter 3
    Accounting Principles (2)

    Current Liabilities and Payroll


    Accounting

    1
    Learning Objectives

    1 Explain how to account for current liabilities.

    Discuss how current liabilities are


    2 reported and analyzed.
    LEARNING Explain how to account for current
    1
    OBJECTIVE liabilities.

    What Is a Current Liability?


    A debt that a
    u company expects to pay within one year or

    u the operating cycle, whichever is longer.

    Current liabilities include notes payable, accounts payable,


    unearned revenues, and accrued liabilities such as taxes payable,
    salaries and wages payable, and interest payable.

    LO 1
    Current Liabilities

    Notes Payable
    u Written promissory note.

    u Frequently issued to meet short-term financing


    needs.
    u Requires the borrower to pay interest.

    u Issued for varying periods.

    LO 1
    Notes Payable
    Illustration: First National Bank agrees to lend $100,000 on
    September 1, 2017, if Cole Williams Co. signs a $100,000,
    12%, four-month note maturing on January 1.

    Instructions

    a) Prepare the entry on September 1st.

    b) Prepare the adjusting entry on December 31st, assuming


    monthly adjusting entries have not been made.

    c) Prepare the entry required on January 1, 2018, the


    maturity date.

    LO 1
    Notes Payable
    Illustration: First National Bank agrees to lend $100,000 on
    September 1, 2017, if Cole Williams Co. signs a $100,000,
    12%, four-month note maturing on January 1.

    a) Prepare the entry on September 1st.

    Cash 100,000
    Notes Payable 100,000

    b) Prepare the adjusting entry on December 31st.


    Interest Expense 4,000
    Interest Payable 4,000
    $100,000 x 12% x 4/12 = $4,000
    Notes Payable
    Illustration: First National Bank agrees to lend $100,000 on
    September 1, 2017, if Cole Williams Co. signs a $100,000,
    12%, four-month note maturing on January 1, 2018.

    c) Prepare the entry at maturity.

    Notes Payable 100,000


    Interest Payable 4,000
    Cash 104,000

    LO 1
    Current Liabilities

    Sales Taxes Payable


    u Sales taxes are expressed as a stated percentage of
    the sales price.

    u Selling company (retailer)

    ► collects tax from the customer.

    ► enters tax separately in cash register or includes in


    total receipts.

    ► remits the collections to the state’s department of


    revenue.

    LO 1
    Sales Taxes Payable

    Illustration: Cooley Grocery enters total receipts of $10,600. The


    amount received from the sale is equal to the sales price $10,000
    plus $600 as sales tax, the journal entry is:

    Mar. 25 Cash 10,600


    Sales revenue 10,000
    Sales tax payable 600
    Current Liabilities
    Unearned Revenue
    Revenues received before the company
    u delivers goods or

    u provides services.

    LO 1
    Unearned Revenue
    Illustration: Superior University sells 10,000 season football
    tickets at $50 each for its five-game home schedule. The entry
    for the sale of season tickets is:

    Aug. 6 Cash 500,000


    Unearned Ticket Revenue 500,000

    Suppose one game is played (2000 tickets), Superior records the


    recognition of revenue with the following entry.

    Sept. 7 Unearned Ticket Revenue 100,000


    Ticket Revenue 100,000
    DO IT! 1 Current Liabilities
    1. If cash is borrowed on a $50,000, 6-month, 12% note on September
    1, how much interest expense would be incurred by December 31?

    Solution

    $50,000 x 12% x 4/12 = $2,000

    2. If $15,000 is collected in advance on November 1 for 3 months’ rent,


    what amount of rent revenue should be recognized by December 31?

    Solution
    $15,000 x 2/3 = $10,000
    DO IT! 2 Current Liabilities

    On June 1, Streamsong Company borrows $150,000 from First Bank on a 6-month,


    $150,000, 8% note.

    Instructions

    (a) Prepare the entry on June 1.

    (b) Prepare the adjusting entry on June 30.

    (c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries
    have been made through November 30.

    (d) What was the total interest expense?


    DO IT! 2 Current Liabilities

    On June 1, Streamsong Company borrows $150,000 from First Bank on a 6-month,


    $150,000, 8% note.

    (a) the entry on June 1

    (b) the adjusting entry on June 30


    DO IT! 2 Current Liabilities

    On June 1, Streamsong Company borrows $150,000 from First Bank on a 6-month,


    $150,000, 8% note.

    (c) the entry at maturity (December 1), assuming monthly adjusting entries have
    been made through November 30.

    (d) the total interest expense is $6,000


    DO IT! 3 Current Liabilities

    Derby University sells 4,000 season basketball tickets at $180 each for its 12-game
    home schedule.

    Give the entry to record

    (a) the sale of the season tickets

    (b) the revenue recognized by playing the first home game (ticket value $60,000)
    DO IT! 3 Current Liabilities

    Derby University sells 4,000 season basketball tickets at $210 each for its 12-game home
    schedule.

    (a) the sale of the season tickets

    (b) the revenue recognized by playing the first home game


    Current Liabilities
    Current Maturities of Long-Term Debt
    u Portion of long-term debt that comes due in the current
    year.

    u No adjusting entry required.

    Illustration: Wendy Construction issues a five-year, interest-bearing


    $25,000 note on January 1, 2017. This note specifies that each January 1,
    starting January 1, 2018, Wendy should pay $5,000 of the note. When the
    company prepares financial statements on December 31, 2017,
    $5,000
    1. What amount should be reported as a current liability? ___________
    $20,000
    2. What amount should be reported as a long-term liability? _________
    Reporting of Current Liabilities

    u Current liabilities are the first category under liabilities on the balance
    sheet.

    u Each of the main types of current liabilities is listed separately.

    u Companies disclose the terms of notes payable and other key


    information about the individual items in the notes to the financial
    statements.
    Analysis of Current Liabilities

    Liquidity refers to the


    ability to pay maturing
    obligations and meet
    unexpected needs for
    cash.

    Current ratio permits


    us to compare the
    liquidity of different-
    sized companies and
    of a single company at
    different times.

    LO 2
    DO IT! 4 Reporting and Analyzing

    Lepid Company has the following account balances at December 31, 2017.
    Notes payable ($80,000 due after 12/31/18) $200,000, unearned service
    revenue $75,000, other long-term debt ($30,000 due in 2018) $150,000,
    salaries and wages payable $22,000, other accrued expenses $15,000, and
    accounts payable $100,000.

    a. Prepare the current liabilities section of Lepid’s December 31, 2017,


    balance sheet.

    b. Lepid’s current assets are $504,000. Compute Lepid’s working capital


    and current ratio.
    LO 2
    DO IT! 4 Reporting and Analyzing

    a. Prepare the current liabilities section of Lepid’s December 31,


    2017, balance sheet.

    Current liabilities
    Notes payable $120,000
    Accounts payable 100,000
    Unearned service revenue 75,000
    Salaries and wages payable 22,000
    Other accrued expenses 15,000
    Long-term debt due within one year 30,000

    Total current liabilities $400,000

    LO 2
    DO IT! 4 Reporting and Analyzing

    b. Lepid’s current assets are $504,000. Compute Lepid’s working


    capital and current ratio.

    Working capital = Current assets - Current liabilities =


    $504,000 - $400,000 = $104,000

    Current ratio = Current assets ÷ Current liabilities =

    $504,000 ÷ $400,000 = 1.26:1

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