Exam 3 Outline
What is a short term/current liability?
oLiabilities that come due in a year or less.
Long-term liabilities are any liabilities that come due in more than a year.
Unearned Revenue- Receive cash from customers but have not yet provided a good or service.
oRecord journal entry when customer prepays
DR Cash $XX CR Unearned Revenue $XX
oWhen you provide good/service to customer.
DR Unearned Revenue $XX CR Revenue $XX
Sales Tax Payable
oYou sell an item for $10 + 9% sales tax
oRecord journal entry when customer purchases
DR Cash $10.90 CR Revenue $10 CR Sales Tax Payable $0.90
oWhen pay the taxing authority
DR Sales Tax Payable $0.90 CR Cash $0.90
Payroll Taxes
oYou pay an employee $10,000, deduct $1,000 in federal income tax, $500 in state
income tax and 6.2% in FICA-Social Security and 1.45% in FICA –Medicare. Record the
journal entry.
DR Wages Expense $10,000
CR Federal Income Tax Payable $1,000
CR State Income Tax Payable $500
CR FICA SS Payable $620 ($10,000 * .062)
CR FICA MEDICARE Payable $145 ($10,000 * .0145)
CR Cash $7,735 ($10,000 - $1,000 - $500 - $620 - $145)
Contingent Liabilities- A liability or expense that is dependent on some future event occurring.
Warranties
oYou provide a warranty and estimate you’ll pay $100k to fix products under warranty.
oRecord warranty expense
DR Warranty Expense $100k CR Warranty Payable $100k
oYou spend $98k to fix products under warranty
oRecord payment of warranty costs.
DR Warranty Payable $98k CR Cash $98k
Notes Payable-Short term
oYour company borrows $10,000 for 7 months on Nov. 1 2019.
oJournal entry to record loan
DR Cash $10,000 CR Notes Payable $10,000
oDetermine interest expense
Accrue interest, record journal entry on Dec. 31st 2019
Chapter 8 –Short term Liabilities
Interest Expense= $10,000 * .05 * 2/12 = $83.33
oDR Interest Expense $83.33 CR Interest Payable $83.33
Determine Interest expense when loan matures on May 31st, 2020
Interest Expense= $10,000 * .05 * 5/12 = $208.33
Record journal entry when loan matures
DR Interest Payable $83.33
DR Notes Payable $10,000
DR Interest Expense $208.33
CR Cash $10,291.33
Chapter 9- Long term Liabilities
Bonds Payable-what is a bond?
oWhat are term bonds vs serial bonds
Term: All bonds mature on the same date.
Serial: All bonds mature on different dates.
oFace Value, Stated rate/Coupon rate vs market rate/yield
Face Value= Principal Value
Stated/Coupon/Nominal Rate= Interest Rate
Market Rate/Yield= Rate investors demand. It is determined by the riskiness of
the issuer/firm.
o$1,000 bonds with stated rate of 4% and a yield of 5%
oHow do you calculate the amount of interest paid each period?
Assume you pay interest annually: $1,000 * .04 = $40
oWhen are Bonds issued at Par: Stated Rate = Market Rate ($1,000 bond will be issued at
$1,000)
oWhen are Bonds issued at a Discount: Market Rate < Stated Rate ($1,000 bond will be
issued at less than $1,000)
oWhen are Bonds issued at a Premium: Market Rate > Stated Rate ($1,000 bond will be
issued at more than $1,000)
oBond issued at 97 vs 101
$1,000 * .97 = $970 (DISCOUNT)
$1,000 * 1.01 = $1,010 (Premium)
Mortgage Payable
oOn Jan 1, 2018 you obtain a 30 year $500,000 mortgage at 3.5% with yearly mortgage
payments of $27,186.
o Record mortgage
DR Building $500,000
CR Mortgage Payable $500,000
oMortgage Payment
Determine Interest expense
Amount applied to the principal
Loan balance
Date Payment Interest Principal Loan Balance
Jan 1 2018 $500,000
Dec. 31, 2018 $27,186 $500,000 * .035
= $17,500
$27,186 -
$17,500 =
$9,686
$500,000 -
$9,686 =
$490,314
Dec. 31, 2019 $27,186 $490,314 * .035
= $17,161
$27,186 -
$17,161 =
$10,025
$490,000 -
$10,025=
$480,289
Deferred Taxes
oWhen does a Deferred Tax liability occur?
When taxable income under IRS rules is less than taxable income under US
GAAP.
What does the leverage ratio measure?
oCalculation of Leverage ratio is =Average Liabilities/Average Stockholders’ Equity
Liabilities Stockholders’ Equity
2018 $5m $2m
2019 $7m $4m
Average Liabilties = ($5m + $7m)/2m = $6m
Average SE = ($2m + $4m)/2m = $3m
Leverage Ratio = $6m/$3m = 2
The higher the ratio the more risky it is.
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