Chapter 09 – Reporting and Analyzing Current Liabilities
9-1
Chapter 09
Reporting and Analyzing Current Liabilities
Student Learning Objectives and Related Assignment Materials*
Student Learning Objectives
Discussion
Questions
Quick
Studies
Exercises
Problems
(A &B set)**
Beyond the
Numbers
Conceptual objectives:
C1. Describe current and long-term
liabilities and their
characteristics.
1, 14
9-1, 9-14
9-1
TTN
C2. Identify and describe known
current liabilities.
15, 16, 17
9-2, 9-3,
9-14
9-2
TIA
C3. Explain how to account for
contingent liabilities.
1, 11
9-4
9-3
CIP
Analytical objectives:
A1. Compute the times interest
earned ratio and use it to
analyze liabilities.
9-11
9-12
9-5
RIA, CA,
TTN, ED,
GD
Procedural objectives:
P1. Prepare entries to account for
short-term notes payable.
9-5
9-4, 9-5
9-1
TIA
P2. Compute and record employee
payroll deductions and
liabilities.
5, 6, 7, 8
9-6
9-6, 9-7,
9-15, 9-16
9-2, 9-3, 9-6
HTR
P3. Compute and record employer
payroll expenses and liabilities.
5, 9
9-7
9-6, 9-8,
9-15, 9-16
9-2, 9-3, 9-6
P4. Account for estimated
liabilities, including warranties
and bonuses.
2, 3, 10
9-8, 9-9,
9-10, 9-13
9-9, 9-10,
9-11, 9-13,
9-18
9-4
RIA, EC
P5. Identify and describe the details
of payroll reports, records, and
procedures. (Appendix 9A)
12, 13
9-12
9-14, 9-17
9-6
Notes appear on next page.
Chapter 09 – Reporting and Analyzing Current Liabilities
* Assignment materials that can be completed by students using:
Chapter 09 – Reporting and Analyzing Current Liabilities
9-3
Chapter Outline
Notes
I. Characteristics of Liabilities
A. Defining Liabilities
A liability is a probable future payment of assets or services that a
company is presently obligated to make as a result of past
transactions or events. Note three crucial factors:
1. Past transaction or event.
2. Present obligation.
3. Future payment of assets or services.
B. Classifying Liabilities
1. Current liabilities (also called short-term liabilities)—
Obligations due within one year or the company’s operating
cycle, whichever is longer.
2. Long-term liabilities—Obligations not expected to be paid
within the longer of one year or the company’s operating
cycle.
C. Uncertainty in Liabilities—answers to the following questions are
often decided when a liability is incurred; however, one or more
may be uncertain for some liabilities:
1. Whom to pay?
2. When to pay?
3. How much to pay?
II. Known Liabilities—Set by agreements, contracts, or laws and are
measurable. Examples of these liabilities in the current classification
include:
A. Accounts Payable
Amounts owed to suppliers, also called vendors, for products or
services purchased with credit; also known as trade accounts
payable.
B. Sales Taxes Payable
Amounts the seller has collected as sales taxes from customers
when sales occur, which have not yet been remitted to the proper
governmental agency.
1. Entry (by seller) to record cash sale subject to sales tax: debit
Cash, credit Sales, credit Sales Taxes Payable.
2. Entry (by seller) when sales taxes are remitted: debit Sales
Tax Payable, credit Cash.
Chapter 09 – Reporting and Analyzing Current Liabilities
9-4
Chapter Outline
Notes
C. Unearned Revenues
Amounts received in advance from customers for future products
or services; also known as deferred revenues, collections in
advance and prepayments.
1. Entry to record receipt of amounts in advance for future
products or services: debit Cash, credit Unearned Revenue.
2. Entry to record revenue for that portion earned: debit
Unearned Revenue, credit Revenue.
D. Short-Term Notes Payable
Written promise to pay a specified amount on a definite future
date within one year or the company’s operating cycle, whichever
is longer. Can arise from many transactions; two common
examples:
1. Note given to extend credit period; interest-bearing note is
substituted for an overdue account payable.
a. Entry to record partial payment on account and
substitution of note payable for overdue amount: debit
Accounts Payable, credit Cash, credit Notes Payable.
b. Entry to record payment when note becomes due: debit
Note Payable, debit Interest Expense, credit Cash.
2. Note given to borrow from bank
Entries (by borrower) to record:
a. Receipt of cash when note is signed: debit Cash, credit
Note Payable.
b. Payment of principal and interest: debit Note Payable,
debit Interest Expense, credit Cash.
c. Accrual of interest when notes payable are outstanding at
the end of a period: debit Interest Expense, credit Interest
Payable.
d. Payment of note when interest has been accrued: debit
Interest Expense (amount incurred since accrual date),
debit Interest Payable (amount previously accrued), debit
Notes Payable, credit Cash (for full amount paid).
E. Payroll Liabilities
An employer incurs several expenses and liabilities from salaries
and wages earned, from employee benefits, and from payroll taxes
levied on the employer.
1. Gross pay—total compensation an employee earns (includes
wages, salaries, commissions, bonuses).
2. Net pay—gross pay less all deductions; also called take-home
pay.
Chapter 09 – Reporting and Analyzing Current Liabilities
9-5
Chapter Outline
Notes
3. Employee Payroll Deductions—amounts withheld from an
employee’s gross pay, either required or voluntary; commonly
called withholdings. The employer withholds payroll
deductions from employees’ pay and is obligated to remit to
the designated organizations.
a. Employee FICA taxes (Social Security and Medicare
taxes) equal current rate times gross wages subject to tax.
(For year 2013, Social Security tax is 6.2% of the first
$113,700 earned by the employee in the calendar year and
Medicare tax is 1.45% of all amounts earned by the
employee).
b. Employee income tax withholding is determined from
tables published by the IRS based on employee’s annual
earnings rate and the number of withholding allowances
claimed.
c. Employee voluntary deductions (charitable contributions,
medical insurance premiums, pension contributions, and
union dues) are withheld and reported as part of the
employer’s current liabilities until paid.
4. Illustrative entry (by employer) to accrue payroll expenses and
liabilities: debit Salaries Expense, credit FICA-Social
Securities Taxes Payable, credit FICA-Medicare Taxes
Payable, credit Employee Federal Income Taxes Payable,
credit Employee Medical Insurance Payable, credit Employee
Union Dues Payable, credit Salaries Payable (for the amount
of the net pay).
5. Employer Payroll Taxes are recorded as expenses and
current liabilities. Employer taxes include:
a. Employer FICA taxes—employers must pay FICA taxes
equal in amount to the FICA taxes withheld from their
employees.
b. Federal and state unemployment taxes—Employers must
pay a federal unemployment tax on wages and salaries
paid to their employees. (For year 2013, employers were
required to pay FUTA taxes of as much as 6.0% on the
first $7,000 earned by each employee; this tax can be
reduced by a credit of up to 5.4% for taxes paid to a state
program.) All states place a payroll tax for unemployment
insurance on employers; the amounts vary.
Chapter 09 – Reporting and Analyzing Current Liabilities
9-6
Chapter Outline
Notes
c. Illustrative entry (by employer) to record payroll tax
expense and related liabilities: debit Payroll Tax Expense,
credit FICA-Social Securities Taxes Payable, credit FICA-
Medicare Taxes Payable, credit State Unemployment
Taxes Payable, credit Federal Unemployment Taxes
Payable.
F. Multi-Period Known Liabilities—often include unearned revenues
and notes payable that extend over multiple periods.
III. Estimated Liabilities—Known obligations of uncertain amounts that
can be reasonably estimated. Examples are:
A. Health and Pension Benefits
1. Employers often pay all or part of medical, dental, life, and
disability insurance, and many employers also contribute to
pension plans.
2. Illustrative entry to record these benefits: debit Employee
Benefits Expense, credit Employee Medical Insurance
Payable, credit Retirement Program Payable.
B. Vacation Benefits—Estimated and recorded by the employer
during the weeks the employees are working and earning the
vacation time.
1. Many employers offer paid vacations.
2. Entry to record: debit Vacation Benefits Expense, credit
Vacation Benefits Payable. When employees take
vacation, employer reduces (debits) the Vacation Benefits
Payable and credits Cash.
C. Bonus Plans
1. Many companies offer bonuses to employees; many bonuses
depend on net income.
2. The related expense and liability are recorded in a year-end
adjusting entry.
D. Warranty Liabilities
1. A warranty is a seller’s obligation to replace or correct a
product (or service) that fails to perform as expected within a
specified period.
2. To comply with the full disclosure and matching principles,
the seller reports the expected warranty expense in the period
when revenue from the sale of the product or service is
reported. The warranty obligation is reported as a liability
even though the amount, payee, and date are uncertain. The
costs are probably and the amount can be estimated based on
past experience.
E. Multi-Period Estimated Liabilities
Reported as both current and long-term depending on when
payment will be made.