Chapter 09 – Reporting and Interpreting Liabilities
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1. When interest periods are less than a year, the values of n
LO 8 – Apply the present value concept to the reporting of long-term liabilities.
F. Accounting Applications of Present Value
1. Computing the amount of a liability with a single
payment
entries are illustrated in text
3. Present values involving both an annuity and a single
payment
a. Compute the present value of the annuity
Related present value
computations and journal
Help 9-2
c. Add the two amounts together
VI. Chapter Supplement A: Present Value Computations using a Calculator or Excel
A. Calculating Present Values Using the HP 10BII+
Steps illustrated in text
Steps illustrated in text
C. Calculating Present Values Using the HP 12C
D. Calculating Present Values Using Excel
Steps illustrated in text
VII. Chapter Supplement B: Deferred Taxes
A. Deferred Taxes
1. Companies follow GAAP for financial reporting but the
Internal Revenue Code when creating their tax returns.
a. Following different rules can create what are called
temporary tax differences
i. Temporary tax differences––result from companies
b. Deferred tax liability––created when differences in
financial reporting and tax reporting cause accounting
income to be higher than tax income in a given period
Chapter 09 – Reporting and Interpreting Liabilities
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B. Example
1. Starbucks owns a building that originally cost $10
million; book value on the balance sheet is $8.5 million;
for tax purposes, book value is $6.5 million
a. The $2 million difference is caused by using straight-
line depreciation for financial reporting and
accelerated depreciation for tax purposes
tax liability of $420,000 is reported on balance sheet
2. At the end of the following year, the company would
compare the tax book value and the GAAP book value of
the building
a. The tax book value of the building was $6 million and
the GAAP book value was $8.2 million
b. The timing difference is $2.2 million, resulting in a
deferred tax liability of $462,000 ($2.2 million × 21%)
income tax payment +/ – change in deferred taxes
(+E, –SE)
cr Income Taxes Payable (+L)
taxes is discussed in
Taxes Payable (L) +550,000 + Income Tax Expense
(E, SE) –592,000
3. Each temporary difference has an impact on the income
statement in one accounting period and the tax return in
another
differences between the
income statement and tax
return
Chapter 09 – Reporting and Interpreting Liabilities
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Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 9-1
2. Handout 9-2
Use Handout 9-2 for an in-class activity to review the accounting for deferred revenues. The solution
3. Handout 9-3
4. Handout 9-4
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 1
PAYROLL ENTRIES
J&W Buffet Co. employees earned $350,000 in the week ended December 17. Of this, $26,775 was
deducted from employees’ pay for FICA and $62,000 was deducted for income taxes.
Prepare the journal entry to record the employees’ portion of payroll for December 17.
Debit and credit the accounts affected
Dec. 17
Prepare the journal entry to record the employer’s share of FICA payroll taxes for December 17.
Debit and credit the accounts affected
Dec. 17
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 1 SOLUTION
PAYROLL ENTRIES
J&W Buffet Co. employees earned $350,000 in the week ended December 17. Of this, $26,775 was
deducted from employees’ pay for FICA and $62,000 was deducted for income taxes.
Prepare the journal entry to record the employees’ portion of payroll for December 17.
Debit and credit the accounts affected
Dec. 17
Compensation Expense (+E, –SE)
350,000
Liability for Income Taxes Withheld (+L)
62,000
FICA Payable (+L)
26,775
Cash (–A)
261,225
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
–261,225
Taxes W/H
FICA
Liability
+62,000
Compensation
–350,000
Prepare the journal entry to record the employer’s share of FICA payroll taxes for December 17.
Debit and credit the accounts affected
Dec. 17
Compensation Expense (+E, –SE)
26,775
FICA Payable (+L)
26,775
Ensure the equation still balances and debits = credits
Payable
Expense
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 2
DEFERRED REVENUE
On January 1, Year 1, Charlie Rangel paid $2,000 for a two–year membership to the Beam Gym.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
By December 31, Year 1, one half of Rangel’s membership expired. Prepare the adjusting journal entry.
Debit and credit the accounts affected
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Debit and credit the accounts affected
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Post the entries above to the Deferred Revenue account:
– Deferred Revenue (L) +
End Bal
End Bal
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 2 SOLUTION
DEFERRED REVENUE
On January 1, Year 1, Charlie Rangel paid $2,000 for a two–year membership to the Beam Gym.
Prepare the journal entry to record the receipt of cash on January 1, Year 1.
Debit and credit the accounts affected
Cash (+A)
Ensure the equation still balances and debits = credits
Cash
Deferred
+2,000
By December 31, Year 1, one half of Rangel’s membership expired. Prepare the adjusting journal entry.
Debit and credit the accounts affected
Dec. 31
Deferred Revenue (–L)
1,000
Revenue (+R, +SE)
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Unearned
Revenue
–1,000
Revenue
+1,000
Debit and credit the accounts affected
Revenue (+R, +SE)
1,000
Ensure the equation still balances and debits = credits
Revenue
Dec. 31, Year 1
Dec. 31, Year 2
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 3
NOTES PAYABLE
Mumford Co. borrowed a $100,000 note payable on June 1, Year 1, with 6% interest. The note is due on
May 31, Year 2.
Prepare the journal entry to record the issuance of the note and receipt of cash on June 1, Year 1.
Debit and credit the accounts affected
Assets
=
Liabilities
+
Stockholders’ Equity
Prepare the adjusting journal entry to record the interest owed at the end of the accounting period on
December 31, Year 1.
Debit and credit the accounts affected
Dec. 31
Assets
=
Liabilities
+
Stockholders’ Equity
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 3 SOLUTION
NOTES PAYABLE
Mumford Co. borrowed a $100,000 note payable on June 1, Year 1, with 6% interest. The note is due on
May 31, Year 2.
Prepare the journal entry to record the issuance of the note and receipt of cash on June 1, Year 1.
Cash (+A)
100,000
Note Payable (+L)
100,000
June 1
June 1
Prepare the adjusting journal entry to record the interest owed at the end of the accounting period on
December 31, Year 1.
Principal × Rate × Time Period = $100,000 × 6% × 7/12 = $3,500
Interest Expense (+E, –SE)
3,500
Interest Payable (+L)
3,500
3,500
Dec. 31
Dec. 31
Prepare the journal entries to record the interest and principal payments to the lender on May 31, Year 2.
May. 31
Interest Expense (+E, –SE) ($100,000 × 6% × 5/12)
2,500
Interest Payable (–L)
3,500
Cash (–A) ($100,000 × 6% × 12/12)
6,000
May 31
Note Payable (–L)
100,000
Cash (–A)
100,000
Year 1
June 1
Year 2
May 31
May 31
Year 2
May 31
Year 1
3,500
Dec. 31
Year 2
May 31
Year 1
June 1
Year 2
May 31
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 4
PRESENT AND FUTURE VALUES
1. What is the present value of $3,000 received 5 years from now, assuming 20% interest?
4. What is the future value of an annuity of $7,500, invested at 12%, at maturity in 5 years?
Chapter 09 – Reporting and Interpreting Liabilities
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HANDOUT 9 – 4 SOLUTION
PRESENT AND FUTURE VALUES
1. What is the present value of $3,000 received 5 years from now, assuming 20% interest?
2. What is the present value of an annuity of $50,000 received over 20 years, assuming 9% interest?
3. What is the future value of $12,000, invested now at 10%, at maturity in 3 years?
4. What is the future value of an annuity of $7,500, invested at 12%, at maturity in 5 years?