Chapter 13 - part 1: Current Liabilities I. General Information A. Current liabilities are those obligations whose settlement will likely require the use of current assets. B. From a financial analysis standpoint, current liabilities can be used to help assess a company’s liquidity. (1) Current ratio = Current Assets/Current Liabilities (2) Working capital = Current Assets – Current Liabilities (3) Quick ratio = (Current Assets – Inventory) / Current Liabilities II. Categories of Current Liabilities A. Accounts payable 1) These are current liabilities owed to suppliers of goods or services that arise in the ordinary course of business 2) Typically, due dates are within a short period of time (30 – 60 days) 3) Often termed trade payables. B. Notes payable 1) A written promise to pay a specific sum of $ on a specific future date. 2) Classification of the note as short-term or long-term depends on this payment due date -- the portion of the note that is currently due should be classified as a current liability 3) Interest – Bearing Note: -- Record the note at face value Cash xxx N/P xxx -- Recognize interest expense at appropriate time Int. Exp. xxx Cash / Int. payable xxx -- Pay the principal of the note at maturity N/P xxx Int. Exp. Cash xxx (may also be accrued interest to remove at this time) 4) Non-Interest Bearing Note -- The difference between the cash you receive and the cash you pay back is interest that is implicit in the note. -- Record the issuance of note Cash (Present value of note) xxx Discount xxx Note Pay (face value of note) xxx -- Understand the meaning of the discount account 5) Classification Issues - Current maturities of long-term debt may be reclassified if: -- if the current maturities will be settled with non-current C. D. E. F. assets. (e.g. bond sinking fund classified as long-term) -- if the debt will be converted to stock -- if the current maturities will be refinanced - must demonstrate both the intent to refinance and the ability to refinance. -- GENERAL RULE: Current maturities are not a current liability if they do not require the use of current assets to satisfy the obligation. Dividends Payable -- these are a current liability once they are declared. Returnable Deposits -- whether or not these are current liability depends on the length of time between the date of the deposit and the expected time to return the deposit -- Journal Entry Cash xxx Deposit from customer xxx Unearned Revenue - arised when someone pays you in advance for a good or service. -- Initial journal entry Cash xxx Unearned Rev xxx -- Subsequently Unearned Rev xxx Revenue xxx Sales tax Payable -- Normally: Cash (Sale amount + tax) xxx Sales (sale amount) xxx Sales Tax Payable xxx -- Sometimes, it can be initially recorded in sales acct. Cash xxx Sales xxx Sales G. xxx Sales Tax Payable xxx Property Taxes -- the property tax liability should be recorded through monthly accruals during the period after which the tax is levied. -- Assessment – no entry -- Monthly Prop Tax Expense xxx Prop Tax Payable xxx -- When payment is due Prop Tax Payable xxx Cash xxx -- Note: you could have a prepaid account if you prepay prop. taxes. Prepaid property tax xxx Cash xxx Prop tax expense Prepaid prop. tax xxx xxx H. Income Tax Payable I. Employee-related liabilites 1) Payroll deductions 2) Payroll taxes 3) Compensated Absences – paid vacation; sick leave -- KEY CONCEPT: the expense and the related liability should be recognized in the year earned by the employees. -- Record the expense in the period employee works Wage Exp xxx Vacation/Sick Wages Pay xxx We typically use the current rate of pay and not the future rate applicable when the vacation is taken. Why? B/C the current rate is easy to come up with, is typically lower, and I don’t want to “promise” raises to employees J. Bonus Agreements