10-1 10 Payroll Tax, Federal Tax, State Tax, City Tax, Gift Tax, Estate Tax, Sales Tax, Gas Tax, Unemployment Tax, Property Tax, Excise Tax... What’s next?

10-1

10

Payroll Tax, Federal Tax, State Tax, City Tax, Gift Tax, Estate Tax, Sales Tax, Gas Tax, Unemployment Tax, Property Tax, Excise Tax... What’s next? A Thumb Tax?

REPORTING LIABILITIES

10-2

The Classified Balance SheetThe Classified Balance SheetThe Classified Balance SheetThe Classified Balance Sheet

These are just the Assets. The Liabilities and Owner’s Equity are on the next slide.

10-3

Illustration 2-2

The Classified Balance SheetThe Classified Balance SheetThe Classified Balance SheetThe Classified Balance Sheet

These are just the Liabilities and Owner’s Equity. Assets are on the previous slide.

10-4

Two key features:

1. Company will pay the debt within 1 year (or the

operating cycle, whichever is longer).

2. Company expects to pay the debt from existing current

assets or through the creation of an other current

liability (borrowing from Peter to pay Paul).

Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities

Current liabilities may include short-term notes payable, accounts payable, unearned revenues, and accrued liabilities

such as taxes, salaries and wages, and interest payable.

Liabilities are classified as either current or long-term.

What is a Current Liability?

10-5

Notes Payable

A written promissory note (the exact opposite of

Notes Receivable covered in Chapter 8).

Requires the borrower to pay interest on the debt.

Those due within 1 year of the B/S date are classified

as current liabilities. For example, on a 30 year note

(a mortgage), the amount due within the upcoming

year is considered a current liability, the remaining

balance is still a long term liability!


10-6

National Bank agrees to lend $100,000 on August 1, 2015, to

Papa Ron’s. if Papa signs a $100,000, 12%, 4 month note

maturing on December 1, 2015. The J/E on August 1, 2015 to

record the issuance and proceeds (the cash) for Papa is:

Notes Payable

100,000

Cash 100,000

Current Liabilities – N/PCurrent Liabilities – N/P

Sept. 1

At maturity, Dec. 1, 2015, Papa Honors the face value of the

note plus interest… $100,000 x 12% x 4/12 = 4,0 .

Notes payable 100,000Dec. 1

Interest expense 4,000

Cash 104,000

10-7

Sales Tax Payable Sales taxes are expressed as a stated percentage of the sales

price (a $100 purchase with a 5% sales tax means you pay

$100 plus $5 sales tax or $105).

The retailer collects the tax from the customer then periodically

remits the tax collections to the state’s department of revenue.

If the sale and tax together equals $105 and the tax rate is 5%,

simply divide the $105 by 1.05 and you’ll find out how much

the actual sale is: $105 / 1.05 = $100!

Example: The sale and tax collected together = $4,240, the tax

rate is 6% (or .06). How much was the sale? What is the tax?

The sale is $4,000 ($4,240 / 1.06), the tax is $240


10-8

The March 25 cash register readings for Papa Ron’s Pizza

shows sales of $10,000 and sales taxes of $600 (the sales tax

rate is 6%), the journal entry is:


Mar. 25

Sales revenue10,000

Cash 10,600

Sales tax payable

600When the taxes are eventually sent to the state’s department of

revenue (usually monthly), Papa will debit Sales Tax Payable

and credit Cash for the total Sales Tax collected over that period.

R

RWhose your

daddy?

10-9

Unearned Revenues (remember from Ch 4?)

Revenue (cash) that is received before the company delivers the goods or provides the service.


1. The company debits Cash, and credits a current liability account called Unearned Revenue.

2. Then, when the company earns the revenue, it debits the Unearned Revenue account, and credits a Revenue account (see next slide).

10-10

Appstate sells 10,000 pre-season football tickets (before the

season starts). Tickets are $50 each and cover five home

games. The entry for the total sales of the pre-season tickets is:

Unearned Ticket Revenue 500,000

Cash 500,000Aug. 6

Ticket Revenue – Game 1 100,000

Unearned Ticket Revenue 100,000Sept. 7


As each game is completed, ASU records the earned revenue.

10-11

Papa Ron’s Pizza issues a 5-year, $25,000 note on January 1, 2014.

This note specifies that each year, starting January 1, 2015, Papa

should pay $5,000 of the note. On December 31, 2014:

1. What amount should be reported as a current liability? $5,000

2. What amount should be reported as a long-term liability? $20,000

Current Maturities of Long-Term Debt

The portion of long-term debt that comes due in the

current year is considered a current liability.

No adjusting entry required! Just a reclassification on

the Balance Sheet. Total liabilities has not changed!


10-12

The term “payroll” pertains to both:

Salaries - managerial, administrative, and sales

personnel (a yearly rate or a base $ with

commissions).

Wages - store clerks, factory employees, and manual

laborers (a per hour rate).Determining payroll involves 3 amounts:

(1) gross earnings, (2) payroll deductions, and (3) net pay.

Payroll Expense (payment to employees)

Current Liabilities Payroll Expense and Payroll Tax Expense

Current Liabilities Payroll Expense and Payroll Tax Expense

10-13

Appstate records its payroll expense for the week of March 7:

Salaries and wages expense 100,000

Federal tax payable (IRS)21,864

FICA tax payable (Soc. Sec.)7,650

State tax payable (NC) 2,922Salaries and wages payable (employees) 67,564

SO 3SO 3

Cash (the net pay!) 67,564

Salaries and wages payable 67,564Mar. 9

Record the payment of this payroll on March 9.

Mar. 7

Payroll ExpensePayroll Expense

Note there could be other voluntary deductions from your

wages for medical insurance, retirement, charity donations, etc.

10-14

In addition to Payroll Expense, most businesses have a payroll

“tax” expense resulting from 3 taxes that Federal and State

Govt. agencies levy on employers.

Very Important: These 3 employer expenses, are not included

in the employee’s net pay and are not part of Payroll Expense!

These taxes are: FICA tax (matching the employees’ FICA amount,

covering Soc. Sec. & Medicare = 7.65%) Federal unemployment tax (= 6.2%, can vary) State unemployment tax (NC = 5.4%, can vary)

Payroll Payroll TaxTax Expense ExpensePayroll Payroll TaxTax Expense Expense

10-15

Assume these amounts for the state and federal unemployment

taxes and the FICA from the $100,000 employees’ payroll, ASU

records their payroll “tax” expense and the related liabilities as:

Payroll tax expense 13,850

State unemployment tax payable800

FICA tax payable (Soc. Sec. match)7,650

Federal unemployment tax payable 5,400

Payroll Payroll TaxTax Expense ExpensePayroll Payroll TaxTax Expense Expense

When the taxes are eventually paid to each of these agencies

(usually monthly), ASU will debit the 3 payables and credit

cash for the total amount. FICA will be $7,650 x 2 = $15,300

10-16

Bonds are a form of long term interest-bearing notes payable

issued by corporations, universities, and Govt. agencies.

Usually sold in $1,000 units or in multiples of $1,000’s.

Long-TermLong-Term Liabilities: Bonds Liabilities: BondsLong-TermLong-Term Liabilities: Bonds Liabilities: Bonds

Types of Bonds

Secured (backed with assets/collateral)

Unsecured (no collateral, a junk bond)

Convertible (the bond holder can

exchange the bond for stock at a set price)

Callable (the company can buy back the

bond at a set price)

James (interest is always 007%)

10-17

The company issues a Bond to the investor. The investor

gives $1,000 to the company in exchange for the bond.

The bond’s contract names the company issuing the bond,

the face value, the maturity date, and the contractual

interest rate (the rate stated on the bond).

Face value - principal due at the maturity (e.g., the $1,000).

Maturity date - date the final payment is due.

Contractual interest rate - the rate stated (actually

printed) on the bond to determine how much interest will be

paid and whether it’s paid annually or semi-annually.

Long-TermLong-Term Liabilities: Bonds Liabilities: BondsLong-TermLong-Term Liabilities: Bonds Liabilities: Bonds

Issuing Procedures

10-18

Bonds: Bonds: Long-Term LiabilitiesLong-Term LiabilitiesBonds: Bonds: Long-Term LiabilitiesLong-Term Liabilities

10-19

On Jan. 1. 2014 ASU issued one-hundred $1,000 bonds maturing in 5

years on Dec 31, 2018 and pay 10% interest. Interest is paid once each

year on the last day of the year. The entry to record the initial proceeds

(the initial receipt of the cash) from the issue is:

Jan. 1, 2014 Cash 100,000

Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value

Bonds payable 100,000

To record interest expense on the last day of the year:

Dec. 31, 2014 Interest expense 10,000 Cash 10,000

At the end of 5 years the bonds mature and ASU records the last

interest payment and redemption of its bonds

Dec. 31, 2018 Bonds Payable 100,000 Interest Expense 10,000

Cash 110,000

10-20

8%

10%

12%

Premium

Face Value

Discount

Assume a Bond Contractual Rate of 10%. (the amount pre-printed on the bond)

Bonds Sold AtMarket Interest

Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues

The market rate is what investors demand!

10-21

Issuing Bonds at a Discount/Premium!Issuing Bonds at a Discount/Premium!

If the Market offers a 10% interest rate then a $1,000 investment will provide $100 after 1 year. The total return will be $1,100.

If your Bond only offers an 8% rate then a $1,000 Bond will only return $80 for a total return of only $1,080. So, if you Discount the selling price of the bond $20 to $980, and still give the 8% return on the $1,000 then the investor will get $1,000 + $80 + $20 (the amount saved from the discount) for a similar return on $1,100!

If your Bond offers a 12% rate then a $1,000 Bond will return $120 for a total return of $1,120. So if we sell the Bond at a $20 Premium (the Bond costs $1,020) then the investor will still get a return of $1,100 ($1,000 + $120 - $20 (cost of the Premium)!

So, a $1,000 that sells at 98 means that the price is discounted to 98% of the $1,000 or $980. If it sells at 102 it sells at a premium of 102% of $1,000 and costs $1,020. Great example: a $10,000 bond selling at 963/4 (.9675 or 96¾%) would sell for $9,675!

10-22

Assume that on January 1, 2014, ASU sells $100,000, five-year,

10% bonds at 98 (98% of face value) with interest payable on

January 1 of each seceding year. The J/E at issuance is:

Issuing Bonds at a Issuing Bonds at a DiscountDiscountIssuing Bonds at a Issuing Bonds at a DiscountDiscount

Jan. 1 Cash (98% x $100,000) 98,000

Discount on bonds payable 2,000

Bonds payable 100,000

The total cost of borrowing when bonds are issued at a discount

A $10,000 bond selling at 963/4 (use .9675 or 96.75%) would sell for $9,675!

10-23

Assume the ASU bonds sell at 102 rather than at 98. The J/E

would be:

Jan. 1 Cash (102% x 100,000) 102,000Bonds payable 100,000Premium on bonds payable 2,000

Issuing Bonds at a Issuing Bonds at a PremiumPremiumIssuing Bonds at a Issuing Bonds at a PremiumPremium

The total cost of borrowing when bonds are issued at a premium

10-24

Off-Balance-Sheet Obligations & Financing

Obligations: Contingencies are events with uncertain outcomes that may result in potential liabilities (lawsuits, warranties, clean-up obligations, money back guarantees).

Financing: Leasing is an agreement where you’re either paying for the rental of an asset or whether it’s actually a financed purchase. The question is whether you own the asset when the lease is finished. This is important because:

► Operating leases are treated like expenses. No assets or liabilities show up on the balance sheet, just an operating expense on the income statement.

► Capital leases are treated like an asset purchase, increasing both assets and liabilities. Each year the asset will be depreciated and the liability will be reduced as payments are made. This affects ratios!

Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation

Documents

10-1 10 Payroll Tax, Federal Tax, State Tax, City Tax, Gift Tax, Estate Tax, Sales Tax, Gas Tax, Unemployment Tax, Property Tax, Excise Tax... What’s next?