ACCO 3001 Chapter 12.pptx

ACG 3001 Intermediate Accounting Chapter 12: Current Liabilities Learning Objectives Learning Objective Topics Examples LO 12.1 Describe the nature, valuation, and reporting of current liabilities in the form of payables. 12.1 Current Liabilities Examples 12.1 Accounts Payable 12.2 Interest...

ACG 3001 Intermediate Accounting Chapter 12: Current Liabilities Learning Objectives Learning Objective Topics Examples LO 12.1 Describe the nature, valuation, and reporting of current liabilities in the form of payables. 12.1 Current Liabilities Examples 12.1 Accounts Payable 12.2 Interest-Bearing Note Payable 12.3 Zero-Interest-Bearing Note 12.4 Sales Taxes Payable 12.5 Income Taxes Payable 12.6 Unemployment Taxes 12.7 Employee-Related Liabilities 12.8 Vacation Pay 12.9 Bonus Payable Describe the nature, valuation, and reporting of current liabilities in the form of unearned revenues. 12.2 Unearned Revenues Explain the accounting for loss and gain contingencies. 12.3 Contingencies LO 12.2 LO 12.3 Payable transactions Employee-related payables Ticket revenue Gift cards Customer advances Loss contingencies Gain contingencies Examples 12.10 Unearned Ticket Revenue 12.11 Gift Cards 12.12 Customer Advances Examples 12.13 Guarantee 12.14 Expropriation 12.15 Lawsuit 12.16 Assurance-Type Warranty 12.17 Warranties 12.18 Consideration Payable 12.19 Gain Contingency Current Liabilities Liabilities -“probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.” Operating cycle: Period of time elapsing between the acquisition of goods and services and the final cash realization resulting from sales and subsequent collections. Typical Current Liabilities: 1. Accounts payable. 6. Sales taxes payable. 2. Notes payable. 7. Income taxes payable. 3. Dividends payable. 8. Employee-related liabilities. 4. Customer advances and deposits. 9. Current maturities of longterm debt. 5. Unearned revenues. 3 Current Liabilities Accounts Payable (trade accounts payable) Balances owed to others for goods, supplies, or services purchased on open account. • Terms of the sale (e.g., 2/10, n/30 or 1/10, E.O.M.) usually state period of extended credit, commonly 30 to 60 days. Notes Payable Written promises to pay a certain sum of money on a specified future date. • Arise from purchases, financing, or other transactions. • Classified as short-term or long-term. • May be interest-bearing or zero-interest-bearing. LO 1 4 Current Liabilities: Interest-Bearing Note Illustration: Castle National Bank agrees to lend $100,000 on March 1, 2020, to Landscape Co. if Landscape signs a $100,000, 6 percent, four-month note. Landscape records the cash received on March 1 as follows: Interest-Bearing Note Issued Cash Notes Payable 100,000 100,000 If Landscape prepares financial statements semiannually, it makes the following adjusting entry to recognize interest expense and interest payable at June 30: Interest calculation = ($100,000 x 6% x 4/12) Interest Expense Interest Payable = $2,000 2,000 2,000 At maturity (July 1), Landscape records payment of the note and accrued interest as follows. Notes Payable Interest Payable Cash 100,000 2,000 102,000 5 Current Liabilities: Zero-Interest-Bearing Note Issued Illustration: On March 1, Landscape issues a $102,000, four-month, zero-interest-bearing note to Castle National Bank. The present value of the note is $100,000. Landscape records this transaction as follows. 100,000 Cash Interest is still charged, but its upfront, not on payment date 2,000 Discount on Notes Payable Notes Payable 102,000 Discount on notes payable: • Contra account to notes payable. • Represents the cost of borrowing. • Debited to interest expense over the life of the note. Current liabilities Notes payable Less: Discount on notes payable $102,000 2,000 $100,000 6 Accounts and Notes Payable The following are selected 2020 transactions of Astin Corporation. Sept. 1 - Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system. Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in payment of account. Oct. 1 - Borrowed $50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $54,000 note. 50,000 Sept. 1 Purchases 1,000 Dec. 31 Interest Expense 50,000 Accounts Payable Discount on Notes Payable 1,000 Oct. 1 Accounts Payable 50,000 ($4,000 x 3/12) = $1,000 Notes Payable 50,000 Oct. 1 Dec. 31 Cash Discount on Notes Payable Notes Payable 50,000 4,000 Interest Expense 1,000 Interest Payable ($50,000 x 8% x 3/12) = $1,000 54,000 1,000 7 Current Liabilities Customer Advances and Deposits: Returnable cash deposits received from customers and employees. • To guarantee performance of a contract or service or • As guarantees to cover payment of expected future obligations. • May be classified as current or long-term liabilities. • Payment received before delivering goods or rendering services. Illustration: Allstate University sells 10,000 season football tickets at $50 each for its five-game home schedule. Allstate University records the sales of season tickets as follows. Aug. 6 Cash Unearned Sales Revenue (10,000 × $50 = $500,000) 500,000 500,000 As each game is completed, Allstate makes the following entry. Sept. 7 Unearned Sales Revenue 100,000 Sales Revenue ($500,000 ÷ 5 games = $100,000 per game) 100,000 8 Current Liabilities Sales Taxes Payable: Retailers must collect sales taxes from customers on transfers of tangible personal property and on certain services and then remit to the proper governmental authority. Illustration: Prepare the entry to record sales taxes assuming there was a sale of $3,000 when a 4 percent sales tax is in effect. *Many companies do not Cash Sales Revenue Sales Taxes Payable ($3,000 × 4% = $120) 3,120 3,000 120 segregate the sales tax and the amount of the sale at the time of sale. Instead, the company credits both amounts in total in the Sales Revenue account. Alternate Tax calculation =(Sales Revenue ($150,000) ÷ 1.04 = $144,230.77, $150,000 −$144,230.77 = $5,769.23) Sales Revenue Sales Taxes Payable 5,769.23 5,769.23 9 Current Liabilities Income Taxes Payable: Businesses must prepare an income tax return and compute the income tax payable. • Taxes payable are a current liability. • Corporations must make periodic tax payments. • Differences between taxable income (tax law) and accounting income (GAAP) sometimes occur (Chapter 18). • Illustration: Margo Company reports taxable income of $300,000, and its tax rate is 20%. • In this case, Margo’s income taxes payable is $60,000 ($300,000 × .20) and is recorded as follows. Income Tax Expense Income Taxes Payable 60,000 60,000 10 Employee-Related Liabilities Payroll Deductions: Most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues. Social Security Taxes (since January 1, 1937). • Federal Old Age, Survivor, and Disability Insurance (OASDI) benefits for certain individuals and their families. • Funds from taxes levied on both employer and employee. • Current rate 6.2 percent based on the employee’s gross pay up to a $142,800 annual limit. • OASDI tax is usually referred to as FICA. • In 1965, Congress passed the first federal health insurance program for the aged—popularly known as Medicare. • Alleviates high cost of medical care for those over age 65. • Hospital Insurance tax, paid by both employee and employer at the rate of 1.45 percent on the employee’s total compensation. • OASDI tax (FICA) and the federal Hospital Insurance Tax is referred to as the Social Security tax. 11 Employee-Related Liabilities Payroll Deductions: Unemployment Taxes Federal Unemployment Tax Act (FUTA): • Only employers pay the unemployment tax. • Rate is 6 percent on the first $7,000 of compensation paid to each employee during the calendar year. • If employer is subject to a state unemployment tax of 5.2 percent or more it receives a tax credit (not to exceed 5.4 percent) and pays only 0.8 percent tax to the federal government. State unemployment compensation laws differ both from the federal law and among various states. Employers must refer to the unemployment tax laws in each state in which they pay wages and salaries. Income Tax Withholdings: Federal and some state income tax laws require employers to withhold from each employee’s pay the applicable income tax due on those wages. Item Who Pays Income tax withholding FICA taxes—employee share Union dues Employee FICA taxes—employer share Federal unemployment State unemployment Employer Employer reports these amounts as liabilities until remitted. 12 Employee-Related Liabilities Payroll Deductions Illustration Copyright ©2022 John Wiley & Sons, Inc. LO1 13 Payroll Deductions Example Illustration: Assume a weekly payroll of $10,000 entirely subject to FICA and Medicare (7.65%), federal (0.8%) and state (4%) unemployment taxes, with income tax withholding of $1,320 and union dues of $88 deducted. The company records the salaries and wages paid and the employee payroll deductions as follows: Salaries and Wages Expense Withholding Taxes Payable FICA Taxes Payable Union Dues Payable Cash 10,000 1,320 765 88 7,827 The company records the employers payroll taxes as follows: 1,245 Payroll Tax Expense FICA Taxes Payable FUTA Taxes Payable ($10,000 × 0.8%) SUTA Taxes Payable ($10,000 × 4%) 765 80 400 14 Employee-Related Liabilities Compensated Absences Paid absences for vacation, illness, and holidays. Accrue a liability if all the following conditions exist. • The employer’s obligation is attributable to employees’ services already rendered. • The obligation relates to rights that vest or accumulate. • Payment of the compensation is probable. • The amount can be reasonably estimated. Bonus Agreements Payments to certain or all employees in addition to their regular salaries or wages. • Bonuses paid are an operating expense. • Unpaid bonuses should be reported as a current liability. 15 Contingencies “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” Typical gain contingencies are: 1. Possible receipts of monies from gifts, donations, asset sales, and so on. 2. Possible refunds from the government in tax disputes. 3. Pending court cases with a probable favorable outcome. 4. Tax loss carryforwards (Chapter 18). Gain contingencies are not recorded, disclosed only if probability of receipt is high. LO 3 Loss Contingencies: • Involves possible losses. Likelihood of Loss FASB uses three areas of probability: • Probable. • Reasonably possible. • Remote. 16 Loss Contingencies LO 3 Probability Accounting Probable Accrue Reasonably Possible Footnote Remote Ignore 55 Contingent Liabilities Likelihood of Payment Step 1 Probable Reasonably Possible Estimate Amount Step 2 REPORT Known or reasonable estimate Not reasonably estimable RECORD REPORT Remote NO ACTION Loss Contingencies Scorcese Inc. is involved in a lawsuit at December 31, 2020. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit. (a) Lawsuit Loss Lawsuit Liability 900,000 900,000 (b No entry is necessary. The loss isn’t accrued because it is not probable that a liability has been incurred at 12/31/20. ) 19 Common loss contingencies: 1. 2. 3. 4. Litigation, claims, and assessments. Guarantee and warranty costs. Premiums and coupons. Environmental liabilities. Litigation, claims, and assessments Companies must consider the following factors, in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments. • Time period in which the action occurred. • Probability of an unfavorable outcome. • Ability to make a reasonable estimate of the loss. 20 Guarantee and Warranty Costs: Promise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product. Companies often provide one of two types of warranties to customers: 1. Assurance-type warranty 2. Service-type warranty Assurance-Type Warranty Warranty that the product meets agreed-upon specifications in the contract at the time the product is sold. • Should be expensed in the period the goods are provided or services performed. • Should record a warranty liability. Illustration: Denson Machinery Company begins production of a new machine in July 2020. Each machine is under warranty for one year. It incurs $4,000 in warranty costs in 2020 and $16,000 in 2021. 4,000 Recorded when Warranty Expense 4,000 warranty is claimed Cash, Inventory, Accrued Payroll by customer Recorded on Dec. Warranty Expense 2020 for 2021 Warranty Liability ($20,000 − expectation $4,000) 16,000 16,000 21 Service-Type Warranty Warranty that provides an additional service beyond the assurance-type warranty. • Recorded as a separate performance obligation. • Usually recorded in an Unearned Warranty Revenue account. • Recognize revenue on a straight-line basis over the period the service-type warranty is in effect. • Sale of asset + warranties: Dr. Cash Cr. Unearned Warranty Revenue (reverse & recogn revenue on SL) Cr. Sales Revenue • Warranty costs incurred in the year: Dr. Warranty Expense Cr. Cash, Inventory, or Payroll (if for next year, use a Liability) 22