Chapter 9

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George Mason University *

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Apr 3, 2024

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Chapter 9: Accounting for Current Liabilities Notes Payable Example: XYZ Company loaned $100,000 to the ABC Company for 1 year at 6% interest on September 1, 2018. 1. What transaction should the ABC Company record on September 1, 2018 and how will this transaction effect the financial statements? Debit cash 100,000 Credit notes payable 100,000 2. What transaction should the ABC Company record on December 31, 2018 and how will this transaction effect the financial statements? Debit interest expense 2,000 Credit interest payable 2,000 3. What transaction(s) should the ABC Company record in 2019 and how will the transaction(s) effect the financial statements? Debit interest expense 4,000 Credit interest payable 4,000 Credit cash 106,000 Debit notes payable 100,000- Financing Debit Interest payable 6,000- Operating Sales Tax Liabilities  A merchant acts as a liaison between the taxing authority and the customer paying the tax  i.e. the customer pays the tax to the merchant, the merchant records the amount received as a liability, then on a specified date the merchant remits the taxes collected to the taxing authority (local, state, and/or federal government)  Example: Madison Supply Co. sells merchandise to a customer for $2,000 cash in a state where the sales tax is 6%. What transaction is recorded at the time of the sale and how does it effect the financial statements? 1

 What transaction is recorded when the sales tax is remitted to the tax authority and how does it effect the financial statements? Contingent Liabilities:  Definition - potential obligation arising from a past event 2 Can the amount be estimated? Yes Is it likely to occur? Yes Record in financial statements No Don’t record No Is it likely to occur? Yes Disclose in notes to financials No Don’t record

Warranty Obligations: 1. Promises to correct deficiencies or dissatisfactions in quality, quantity or performance of products or services sold. They usually extend for a certain period of time. 2. Although the amount and timing of warrant obligations are uncertain, warranties usually represent liabilities that must be reported in the financial statements. 3. Example: Assume Madison Company sold $7,000 cash merchandise that had cost $4,000. Madison company guaranteed the merchandise sold to be free from defects for one year following the date of sale. They estimate the warranty liability to be $100. What transactions should Madison record and how will the transactions effect the financial statements? Debit warranty expense 100- Equity Credit warranty payable 100- Liability 4. Madison Company paid $40 cash to repair defective merchandise returned by the customer. What transaction does Madison Company need to record and how will it effect the financial statements? Debit warranty payable 40-Liability Credit cash 40 Classified Balance Sheet:  Separates current (short-term) and long-term assets and current (short-term) and long-term liabilities Current Assets Long-Term Assets Current Liabilities Long-term Liabilities  Allows liquidity to be easily determined  Must provide a sub-total on balance sheet of current vs. non-current balances as seen below: 3

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Review Problem: Brown Inc. experienced the following transactions during 2019. 1. Brown had cash sales of $820,000 that had cost $500,000. The state requires that Brown charges customers an 8% sales tax. 2. Brown paid the state sales tax authority $63,000. 3. On March 1, Brown issued a note payable to County Bank. Brown received $50,000 cash. The note had a one-year term and a 6% annual interest rate. 4. On December 31, Brown recognized accrued interest on the note issued in Event 3. 5. On December 31, Brown recognized warranty expense at a rate of 3% of sales. 6. Brown paid $22,000 cash to settle warranty claims. Required: 1. Prepare in general journal form the entries to record the transactions described above. 5