Kế toán, kiểm toán - Chapter seven: Accounting for liabilitie

Chapter SevenAccounting for Liabilities© 2015 McGraw-Hill Education.Accounting for Notes Payable09/01/14 BorrowingOn September 1, 2014 Herrera Supply Company (HSC) borrowed $90,000 from the National Bank. HSC issued a note payable due in one year with an annual interest rate of 9%. 7-2Accrual of Interest Expense12/31/14 Recognition of Interest ExpenseAt the end of 2014, HSC must accrue interest on its note payable. $90,000 × 9% × 4/12 = $2,700 interest expense 7-3Paying principal & interest at maturity date08/31/15 Recognition of interest expense. Payment of principal and interest on the maturity date, August 31.$90,000 × 9% × 8/12 = $5,400 interest expenseNow, record payment of principal and interest payable. 7-4Accounting for Sales TaxMost states require retail companies to collect sales tax on items sold to their customers. The retailer then remits the tax to the state at regular intervals. Sales tax is a liability to the retailer until paid to the state.HSC sells merchandise to a customer for $2,000 cash in a state where the sales tax rate is 6%. 7-5Accounting for Sales TaxRemitting the tax (paying cash to the state tax authority) is an asset use transaction. 7-6Reporting Contingent Liabilities 7-7Warranty ObligationsTo attract customers, many companies guarantee their products or services. Within the warranty period, the seller promises to replace or repair defective products without charge.Event 1 Sale of MerchandiseHSC sells $7,000 of merchandise for cash. The merchandise had a cost of $4,000. 7-8Warranty ObligationsEvent 2 Recognition of Warranty ExpenseHSC estimates that warranty expense associated with the current sale will be $100. 7-9Warranty ObligationsEvent 3 Settlement of Warranty ObligationHSC pays $40 cash to repair defective merchandise returned by a customer. 7-10Financial StatementsSales Revenue7,000$ Cost of Goods Sold(4,000) Gross Margin3,000 Warranty Expense(100) Net Income2,900$ Income Statement 7-11Installment Notes PayableCash payment determined using present valueconcepts presented in a later chapter.All computations rounded to the nearest dollar; after the 2018 payment the loan balance is 0.Accounting PeriodUnpaid Principal Balance on January 1 Cash Payment on December 31Amount Applied to InterestAmount Applied to Principal2014100,000$ 25,709$ 9,000$ 16,709$ 2015201683,291 25,709 7,496 18,213 65,078 25,709 5,857 19,852 2017201845,226 25,709 4,070 21,639 23,587 25,710 2,123 23,587 7-12With each payment the amount applied to the principal increases and the amount applied to interest decreases.Annual payments are constant.Installment Notes Payable 7-13Line of CreditLagoon Company borrows money using a line of credit to finance building up its inventory. Lagoon repays the loan over the summer using cash generated from sales. (Interest rates generally fluctuate based on a designated interest rate benchmark.)Each borrowing is an asset source transaction. Each repayment is an asset use transaction. 7-14Mason Company issues bonds on January 1, 2011. Principal = $100,000 Stated Interest Rate = 9% Interest Date = 12/31 Maturity Date = Dec. 31, 2015 (5 years)Bond Certificateat Face ValueBond Selling PriceMason CompanyInvestorsMason Company issues bonds on January 1, 2014. Principal = $100,000 Stated Interest Rate = 9% Interest Date = 12/31 Maturity Date = Dec. 31, 2018 (5 years)Bond Certificateat Face ValueBond Selling PriceMason CompanyInvestorsBonds Issued at Face Value 7-15Bonds Issued at Face ValueEvent 1 Issue Bonds for CashIssuing the bonds has the following effect on Mason’s 2014 financial statements:Event 2 Investment in LandPaying $100,000 cash to purchase land is an asset exchange transaction. 7-16Bonds Issued at Face ValueEvent 3 Revenue RecognitionRecognizing $12,000 cash revenue from renting the property is an asset source transaction.Event 4 Expense RecognitionMason’s $9,000 ($100,000 x 0.09) cash payment in each of the 5 years represents interest expense. 7-17Bonds Issued at Face ValueEvent 6 Payoff of Bond LiabilityThe principal repayment on December 31, 2018 will have thefollowing effect on Mason’s 2018 financial statements:Event 5 Sale of Investment in LandSelling the land for cash equal to its $100,000 book value is an asset exchange transaction. 7-18Bond Certificateat Face ValueBond Selling PriceMason CompanyInvestors$100,000 face issued at 95:Bonds Payable $100,000Less: Discount on Bonds Payable (5,000)Carrying Value $ 95,000Bond Certificateat Face ValueBond Selling PriceMason CompanyInvestorsBonds Issued at a Discount 7-19Mason Company issues bonds on January 1, 2011. Principal = $100,000 Stated Interest Rate = 9% Interest Date = 12/31 Maturity Date = Dec. 31, 2015 (5 years)Bond Certificateat Face ValueBond Selling PriceMason CompanyInvestors$100,000 face issued at 105:Bonds Payable $100,000Plus: Premium on Bonds Payable 5,000 Carrying Value $ 105,000Bond Certificateat Face ValueBond Selling PriceMason CompanyInvestorsBonds Issued at a Premium 7-20Current Versus NoncurrentCurrent assets are expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer. Current assets include:CashMarketable SecuritiesAccounts ReceivableShort-Term Notes ReceivableInterest ReceivableInventorySuppliesPrepaid Items 7-21Current Versus NoncurrentCurrent liabilities are due within one year or an operating cycle, whichever is longer. Current liabilities, also called short-term liabilities, include:Accounts PayableShort-Term Notes PayableWages PayableTaxes PayableInterest Payable 7-22End of Chapter Seven 7-23