Chapter 9
Accounting for Current
Liabilities and Payroll
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LO 9-1: Show how notes payable and
related interest expense affect financial
statements.
9-1
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Notes Payable
• In previous chapters, we have examined promissory
notes from the perspective of the lender.
• We will now look at how a company accounts for notes
as a borrower, issuer, or maker.
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9-2
Notes Payable and the Going Concern
Assumption
• Do companies estimate the amount of payables that they
are going to pay?
• Under the going concern assumption, companies expect
to pay their obligations in full.
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9-3
September 1 transaction
On September 1, Year 1, Herrera Supply Company (HSC)
borrowed $90,000 from the National Bank with a one-year term
and a 9% interest rate. This transaction: (1) increases assets
(Cash) and (2) increases liabilities (Notes Payable).
Date
Account Title
Sep. 1
Debit
Cash
Credit
90,000
Notes Payable
90,000
=
Assets
Cash
90,000
+
+
Liab.
=
+
Van
Notes
Payable
+
Interest
Payable
+
n/a
90,000
+
n/a
+
Stockholders' Equity
Common
Stock
+
Retained
Earnings
Revenue
n/a
n/a
−
Expenses
=
Net
Income
=
n/a
Cash Flow
−
n/a +
n/a
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90,000
9-4
FA
December 31, Year 1 transaction
HSC must accrue (recognize) four months of interest expense. This transaction: (1)
increases liabilities (Interest Payable) and (2) decreases equity (Interest Expense).
Principal
×
$90,000
×
Annual interest ×
Time
Rate
Outstanding
0.09
Date
×
4/12
Account Title
Dec. 31
=
Interest
Expense
=
$2,700
Debit
Interest Expense
Credit
2,700
Interest Payable
2,700
=
Assets
Cash
n/a
+
+
Liab.
=
+
Stockholders' Equity
Van
Notes
Payable
+
Interest
Payable
+
Common
Stock
+
Retained
Earnings
Revenue
n/a
n/a
+
2,700
+
n/a
+
(2,700)
n/a
−
−
Expenses
2,700
=
Net
Income
Cash Flow
=
(2,700)
n/a
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9-5
August 31, Year 2 transaction (a)
On August 31, Year 2, the maturity date of the note, three events are recognized. First,
$5,400 of interest expense has accrued since January 1, Year 2.
Principal
×
$90,000
×
Annual interest ×
Time
Rate
Outstanding
0.09
Date
×
8/12
Account Title
Aug. 31
=
Interest
Expense
=
$5,400
Debit
Interest Expense
Credit
5,400
Interest Payable
=
Assets
Cash
+
Van
n/a
+
n/a
=
Liab.
Notes
Payable
n/a
+
+
Interest
Payable
+
+
5,400
+
5,400
Stockholders' Equity
Common
Retained
Stock
+
Earnings
n/a
+
(5,400)
Revenue
n/a
−
−
Expenses
5,400
=
Net
Income
Cash Flow
=
(5,400)
n/a
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9-6
August 31, Year 2 transaction (b)
Second, cash is paid for $8,100, the total amount of interest due on
the note. This transaction: (1) decreases assets (Cash) and (2)
decreases liabilities (Interest Payable).
Date
Account Title
Aug. 31
Debit
Interest Payable
Credit
8,100
Cash
8,100
=
Assets
Cash
(8,100)
+
+
Liab.
=
+
Stockholders' Equity
Van
Notes
Payable
+
Interest
Payable
+
Common
Stock
+
Retained
Earnings
Revenue
−
n/a
n/a
+
(8,100)
+
n/a
+
n/a
n/a
−
Expenses
n/a
=
Net
Income
=
n/a
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Cash Flow
(8,100)
OA
9-7
August 31, Year 2 transaction (c)
Third, HSC must recognize the repayment of the $90,000
principal of the note. This transaction: (1) decreases assets
(Cash) and (2) decreases liabilities (Notes Payable).
Date
Aug. 31
Account Title
Debit
Notes Payable
Credit
90,000
Cash
90,000
=
Assets
Liab.
=
Cash
+
Van
Notes
Payable
+
+
Interest
Payable
+
Stockholders' Equity
Common
Stock
+
Retained
Earnings
Revenue
−
Expenses
=
Net
Income
=
n/a
Cash Flow
−
(90,000)
+
n/a
(90,000)
+
n/a
+
n/a
+
n/a
n/a
n/a
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(90,000)
FA
9-8
LO 9-2: Show how sales tax liabilities
affect financial statements.
9-9
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Sales Tax
• Most states require retailers to collect sales tax on goods
sold to their customers.
• Retailers collect the tax from customers and remit the tax
to the state at regular intervals.
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9-10
Collecting Sales Tax
Event 1: Herrera Supply Company (HSC) sells merchandise to a
customer for $2,000 cash in a state where the sales tax rate is
6%.
Date
Account Title
Event 1
Debit
Cash
Credit
2,120
Sales Tax Payable
120
Sales Revenue
Assets
Cash
+
Van
2,120
+
n/a
Accum.
Deprec.
=
Liab.
Sales Tax
Payable
n/a
=
120
=
+
+
+
+
2,000
Stockholders' Equity
Common
Retained
Stock
+
Earnings
n/a
+
2,000
Revenue
2,000
−
−
Expenses
n/a
=
Net
Income
=
2,000
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Cash Flow
2,120
OA
9-11
Remitting Sales Tax
Event 2: Herrera remits the tax due to the state taxing
authority.
Date
Account Title
Event 2
Debit
Sales Tax Payable
Credit
120
Cash
Assets
Cash
+
Van
(120)
+
n/a
Accum.
Deprec.
=
Liab.
Sales Tax
Payable
n/a
=
(120)
=
+
+
+
+
120
Stockholders' Equity
Common
Retained
Stock
+
Earnings
n/a
+
n/a
Revenue
n/a
−
−
Expenses
n/a
=
Net
Income
=
n/a
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Cash Flow
(120)
OA
9-12
LO 9-3: Define contingent liabilities and
explain how they are reported in the
financial statements.
9-13
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Contingent Liabilities
• A contingent liability is a potential obligation arising
from a past event. The amount or existence of the
obligation depends on some future event. A pending
lawsuit, for example, is a contingent liability.
• Accounting standards require companies to classify
contingent liabilities into one of three categories.
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9-14
Exhibit 9.1: Reporting Contingent Liabilities
Likelihood of Contingent Liability becoming an Actual Liability
If probable and
estimable
If reasonably possible
(or probable but not
estimable)
If remote
Then recognize in the
financial statements
Then disclose in the
notes to the financial
statements
Then need not recognize
or disclose
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9-15
LO 9-4: Explain how warranty
obligations affect financial statements.
9-16
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Warranty Obligations: Event 1
Event 1: Sale of Merchandise – During Year 2, HSC sold for $7,000 cash merchandise
that had cost the company $4,000.
•
Generally within the warranty period, the seller promises to replace or repair
defective products without charge to the customer.
Date
Account Title
Event 1
Debit
Cash
Credit
7,000
Service Revenue
7,000
Cost of Goods Sold
4,000
Inventory
Assets
Cash
1a
7,000
1b
n/a
+
+
+
=
Inventory
n/a
(4,000)
Liab.
+
Acc. Pay.
=
=
n/a
n/a
+
4,000
Stockholders' Equity
Common
Retained
Stock
Earnings
n/a
n/a
+
+
Revenue
7,000
7,000
(4,000)
n/a
−
−
−
Expenses
n/a
4,000
=
Net
Income
=
7,000
7,000
(4,000)
n/a
=
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Cash Flows
OA
9-17
Warranty Obligations: Event 2
Event 2: Recognition of Warranty Expense – HSC estimates that
warranty expense associated with the current sale will be $100.
Date
Account Title
Event 2
Debit
Warranty Expense
Credit
100
Warranties Payable
Assets
Cash
+
Van
n/a
+
n/a
Acc.
Rec
=
Liab.
Warranties
Payable
n/a
=
100
=
+
+
+
+
100
Stockholders' Equity
Common
Retained
Stock
+ Earnings
n/a
+
(100)
Revenue
n/a
−
−
Expenses
100
=
Net
Income
=
(100)
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Cash Flow
n/a
9-18
Warranty Obligations: Event 3
Event 3: Settlement of Warranty Obligation – The company pays
$40 cash to repair defective merchandise returned by a
customer.
Date
Account Title
Event 3
Debit
Warranties Payable
Credit
40
Cash
Assets
Cash
+
Van
(40)
+
n/a
Acc.
Pay.
=
Liab.
Warranties
Payable
n/a
=
(40)
=
+
40
+
+
+
Stockholders' Equity
Common
Retained
Stock
+
Earnings
n/a
+
n/a
Revenue
n/a
−
−
Expenses
n/a
=
Net
Income
=
n/a
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Cash Flow
(40)
OA
9-19
General Ledger T-Accounts
Assets
Cash
Bal. 2,000
(1a) 7,000
=
40 (3)
Bal. 8,960
Inventory
Bal. 6,000
4,000 (1b)
Bal. 2,000
Liabilities
Warranties Payable
(3) 40 100 (2)
60 Bal.
+
Equity
Common Stock
5,000 Bal.
Retained Earnings
3,000 Bal.
2,900 (cl.)
5,900 Bal.
Sales Revenues
(cl.) 7,000
7,000 (1a)
0 Bal.
Cost of Goods
(1b) 4,000
4,000 (cl.)
Bal.
0
Warranty Expense
(2) 100
100 (cl.)
Bal.
0
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9-20
Panel C: Financial Statements, Yr. 2
Year 2, Income Statement
Sales Revenue
$7,000
Cost of Goods Sold
(4,000)
Gross Margin
3,000
Less: Warranty. Exp.
(100)
Assets
Cash
Inventory
Total assets
Net income
Liabilities
$2,900
12/31/Yr. 2 Balance Sheet
Warranties Payable
Stockholders’ Equity
Common Stock
Retained Earnings
Total stockholders’
equity
Total liab. & stck.
equity
$8,960
2,000
$10,960
$60
$5,000
5,900
Yr. 2 Statement of Cash Flows
Operating Activities
Inflow from customers
$7,000
Outflow for warranty
(40)
Net cash outflow from operating
activities
Investing activities
Financing activities
Net change in cash
Plus: Beginning cash Balance
Ending cash balance
6,960
0
0
6,960
2,000
$8,960
$10,900
$10,960
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9-21
LO 9-5: Determine payroll taxes and
explain how they affect financial
statements.
9-22
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Identifying Employees
• People who perform work for your business are
employees. Correct?
• Not necessarily. When a business supervises, directs, and
controls an individual’s work, the individual is an
employee of the business. When a business pays an
individual for specific services, but the individual
supervises and controls the work, then that individual is
an independent contractor.
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9-23
Social Security and Medicare (FICA) Taxes
• The Federal Insurance Contributions Act (FICA) provided
funding for Social Security and Medicare programs.
Approximately 7.5% of each employee’s gross pay is
withheld for FICA tax, and the employer pays an
additional 7.5%.
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9-24
Payroll Taxes
• Payroll taxes only apply to employees. Companies are not
required to withhold taxes from or pay taxes on work
done by independent contractors.
• Employers withhold federal, state, and sometimes local
income taxes, as well as FICA (Social Security and
Medicare) taxes from employees, and then remit those
taxes to the taxing authorities. They also pay
unemployment taxes and the employer portion of FICA
taxes.
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9-25
Deductions from Gross Earnings
Gross monthly salary
$ 6,000
Deductions:
Federal income taxes
FICA Tax—Social Security ($6,000 × 6%)
FICA Tax—Medicare ($6,000 × 1.5%)
Medical insurance premiums
American Cancer Society
$450
360
90
320
25
Total deductions
Net Pay
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1,245
$4,755
9-26
Exhibit 9.3: Employee’s Withholding Allowance
Certificate Form W-4
Form
W-4
Employee’s Withholding Allowance Certificate
OMB No. 1545-0074
Department of the Treasury
Internal Revenue Service
Whether you are entitled to claim a certain number of allowances or exemption from withholding is
subject to review by the IRS. Your employer may be required to send a copy of this form to the IRS.
1 Your first name and middle initial
Last name
2 Your Social Security number
Home address (number and street or rural route)
3
City or town, state, and ZIP code
Note: If married, but legally separated, or spouse is a non-resident alien. Check the
“Single” box.
4 If your last name differs from that shown on your social security card,
check here. You must call 1-800-772-1213 for a replacement card.
⃣
⃣
Single
⃣
Married
⃣
Married, but withhold at higher Single rate
5 Total number of allowances you are claiming (from line H above or from the applicable worksheet on page 2)
5
6 Additional amount, if any, you want withheld from each paycheck
6
$
7 I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.

Last year I had a right to refund of all federal income tax withheld because I had no tax liability, and

This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here. .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
7
Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete.
Date
Employee’s signature
(This form is not valid unless you sign it.)
8 Employee’s name and address (Employer complete lines 8 and 10 only if sending to the IRS.
9 Office code (optional)
For Privacy Act and Paperwork Reduction Act Notice, see page 2.
Cat. No. 102200
10 Employer Identification number (EIN)
Form
W-4
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(2017)
9-27
Exhibit 9.4: Wage and Tax Statement Form W-2
22222
Void
⃣
a Employee’s social security number
For Official Use Only
OMB No. 1545-0006
b Employer identification number (EIN)
1 Wages, tips, other
compensation
2 Federal income tax withheld
c Employer’s name, address, and ZIP code
3 Social security wages
4 Social Security tax withheld
5 Medicare wages and tips
6 Medicare tax withheld
7 Social security tips
8 Allocated tips
9 Verification code
10 Dependent care benefits
11 Nonqualified plans
12a See instructions for Box 12
13
12b
d Control number
e Employee’s first name and
initial
Last name
Suff.
Statutory Retirement Third-party
employee plan
sick pay
⃣
⃣
⃣
12c
14 Other
12d
17 State
income tax
19 Local income tax
f Employee’s address and ZIP code
15 State
Employer’s state ID
number
16 State wages, tips, etc.
Form W-2 Wage and Tax Statement
Copy A For Social Security Administration – Send this entire page with
Form W-3 to the Social Security Administration: photocopies are not acceptable.
18 Local wages, tips,
etc.
2017
20 Locality
name
Department of the Treasury – Internal
Revenue Service
For Privacy Act and Paperwork Reduction
Act Notice, see separate instructions.
Cat. No. 10134D
Do not Cut, Fold, or Staple Forms on This Page
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9-28
Recording Payroll
Account Title
Debit
Salary Expense
Credit
6,000
Employee Income Tax Payable
450
FICA Tax – Social Security Payable
360
FICA Tax – Medicare Payable
90
Medical Insurance Premiums Payable
320
American Cancer Society Payable
25
Cash
Assets
+
Cash
+
Van
Accum.
Deprec.
(4,755)
+
n/a
n/a
4,755
=
Liab.
=
Various
Payables
=
1,245
+
Stockholders' Equity
+
Common
Stock
+
Retained
Earnings
+
n/a
+
(6,000)
−
Revenue
n/a
Expenses
−
6,000
=
Net
Income
=
(6,000)
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Cash Flow
(4,755)
OA
9-29
Payroll Tax Expense
FICA Tax expense – Social Security ($6,000 × 6%)
FICA Tax expense – Medicare ($6,000 × 1.5%)
Federal Unemployment Tax Expense ($1,000 × 0.6%)
State Unemployment Tax Expense ($1,000 × 5.4%)
Total Payroll Tax Expense
Assets
=
Liab.
Payroll
Tax
Payable
=
510
=
+
Cash
+
Van
Accum.
Deprec.
n/a
+
n/a
n/a
+
$360
90
6
54
$510
Stockholders' Equity
+
Common
Stock
+
n/a
+
Retained
Earnings
−
Revenue
+
(510)
n/a
Expenses
−
510
=
Net
Income
=
(510)
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Cash Flow
n/a
9-30
Fringe Benefits
Account Title
+
Van
n/a
+
n/a
Credit
Vacation Pay Expense
200
Employee Medical Insurance Expense
250
Employee Pension Expense
150
Vacation Pay Payable
200
Employee Medical Insurance Payable
250
Employee Pension Liability
150
Assets
Cash
Debit
=
Liab.
+
Stockholders' Equity
+ Accum. = Various
Common
Payables +
Stock
Deprec.
+
n/a
=
600
+
n/a
+
Retained
Earnings
Revenue
(600)
n/a
−
Expenses =
−
600
=
Net
Income
(600)
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Cash Flow
n/a
9-31
LO 9-6: Prepare a classified balance
sheet.
9-32
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Current Versus Noncurrent
• Current assets are expected to be converted to cash or consumed within
one year or an operating cycle, whichever is longer.
• Current assets include:
– Cash
– Marketable securities
– Accounts receivable
– Short-term notes receivable
– Interest receivable
– Inventory
– Supplies
– Prepaid items
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9-33
Current Versus Noncurrent (Continued)
• Current liabilities are due within one year or an operating
cycle, whichever is longer.
• Current liabilities include:
– Accounts payable
– Short-term notes payable
– Wages payable
– Taxes payable
– Interest payable
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9-34
Exhibit 9.5: Balance Sheet Presentation
Limbaugh Company
Classified Balance Sheet
As of December 31, Year 1
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Rent
Total Current Assets
Property, Plant, and Equipment
Office Equipment
Less: Accum. Deprec.
Building
Less: Accum. Deprec.
Land
Total property, plant, and equip.
Total Assets
$20,000
35,000
230,000
3,600
$288,600
$80,000
(25,000)
340,000
(40,000)
55,000
300,000
120,000
475,000
$763,600
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
Notes Payable
Salaries Payable
Unearned Revenue
Total Current Liabilities
Long-Term Liabilities
Notes Payable
Total Liabilities
Stockholders’ Equity
Common Stock
Retained Earnings.
Total liab and Stockholders’ Equity
$32,000
120,000
32,000
9,800
$193,800
100,000
293,800
200,000
269,800
469,800
$763,600
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9-35
LO 9-7: Use the current ratio to assess
the level of liquidity.
9-36
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Current Ratio
Current Ratio
Current Assets
=
Current Liabilities
For Limbaugh Company, the current ratio is:
Current Ratio
=
$288,600
$193,800
=
1.49:1
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9-37
Liquidity Versus Solvency
• Liquidity describes the ability to generate sufficient
short-term cash flows to pay obligations as they come
due. Solvency is the ability to repay liabilities in the long
run.
• Liquidity is often measured by the current ratio.
• Solvency is often measured by the debt to assets ratio.
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9-38
Exhibit 9.6: Liquidity Versus Solvency
Industry
Electric Utilities
Clothing Stores
Building Supplies
Company
American Electric Power
Dominion Resources
American Eagle Outfitters
The Gap
Home Depot
Lowes
Current
Ratio
Debt to Assets
Ratio
0.64
0.52
1.56
1.57
1.36
1.01
0.73
0.76
0.35
0.66
0.85
0.75
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9-39
LO 9-8: Show how discount notes and
related interest charges affect financial
statements. (Appendix)
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9-40
Discount Notes
• Discount notes are ones in which the interest is withheld
from the proceeds when the note is issued. The face
value of the note is the amount that will be repaid at
maturity.
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9-41
Issuing a Discount Note – Event 1
• Event 1: Beacon Management Services was started when
it issued a $10,000 face value discount note to State Bank
on March 1, Year 1. The one-year note carried a 9%
discount rate.
Face value of the note
$10,000
Less discount ($10,000 × .09 × 1)
(900)
Proceeds (amount borrowed)
$ 9,100
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9-42
Issuing a Discount Note – Event 1 (Continued)
Account Title
Debit
Cash
Credit
9,100
Discount on Notes Payable
900
Notes Payable
10,000
Discount on Notes Payable is a contra liability account.
Assets
=
Cash
=
9,100
=
Liab.
Stockholders' Equity
+
Discount
Notes
+ on Notes
Retained
Common
Payable +
Stock
Payable
+ Earnings
10,000
(900)
+
n/a
+
n/a
−
Revenue
n/a
−
Net
Expenses = Income
n/a
=
n/a
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Cash Flow
9,100
FA
9-43
Issuing a Discount Note: Event 2
• Event 2: Beacon incurred $8,000 of cash operating
expenses.
Account Title
Debit
Operating Expenses
Credit
8,000
Cash
Assets
=
Cash
+
Machine
=
(8,000)
+
n/a
=
8,000
Liab
+
+
n/a
+
Stockholders' Equity
Common
Stock
+
n/a +
Retained
Earnings
(8,000)
−
Revenue
n/a
−
Expense
=
8,000
=
Net
Income
(8,000)
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Cash Flow
(8,000)
OA
9-44
Issuing a Discount Note: Event 3
• Event 3: Beacon recognized $12,000 of cash service
revenue.
Account Title
Debit
Cash
Credit
12,000
Service Revenue
Assets
=
Cash
+
Machine
=
12,000
+
n/a
=
Liab
+
+
n/a
+
12,000
Stockholders' Equity
Common
Stock
+
n/a +
Retained
Earnings
12,000
=
Net
Income
=
12,000
−
Revenue
12,000
Expense
−
n/a
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Cash Flow
12,000
OA
9-45
Recognizing Interest on a Discount Note: Event 4
• Event 4: On December 31, Year 1, Beacon recorded an adjusting
entry to recognize interest accrued since March 1.
$900 Discount/12 months = $75
$75 × 10 months = $750
Account Title
Debit
Interest Expense
Credit
750
Discount on Notes Payable
Assets
=
Cash
+
Machine
n/a
+
n/a
Liab
Discount on
= Notes Payable
=
750
+
+
+
750
Stockholders' Equity
Common
Stock
+
n/a +
Retained
Earnings
(750)
=
Net
Income
=
(750)
−
Revenue
n/a
Expense
−
750
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Cash Flow
n/a
9-46
Exhibit 9.7: Panel A & B – Transactions and Ledger
Accounts
Panel A: Transaction Summary
1. Beacon issued a $10,000 face-value, one-year discount note with a 9 percent discount rate.
2. Beacon paid $8,000 cash for operating expenses.
3. Beacon earned cash service revenue of $12,000.
4. Beacon recognized $750 of accrued interest expense.
5. Beacon closed the revenue and expense accounts. The letters cl are the posting reference for the closing entry.
Panel B: General Ledger:
Assets
Cash
(1) 9,100
(3) 12,000
Bal. 13,100
=
8,000 (2)
Liabilities
Notes Payable
10,000 (1)
10,000 Bal.
Discount on Notes Payable
(1)
900
750
(4)
Bal.
150
+
Equity
Retained Earnings
3,250 (cl)
3,250 Bal.
Service Revenue
(cl) 12,000
12,000 (3)
0 Bal.
Operating Expenses
(2) 8,000
8,000 (cl)
Bal. 0
Interest Expense
(2) 750
750 (cl)
Bal. 0
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9-47
Exhibit 9.7: Panel C — Financial Statements
Year 1, Income Statement
Service Revenue
$12,000
Operating Expenses
(8,000)
Assets
Cash
Operating Income
Total assets
Interest Expense
4,000
750
12/31/Yr. 1 Balance Sheet
$3,250
$13,10
0
$13,10
0
Liabilities
Notes Payable
Net income
Yr. 1 Statement of Cash Flows
Operating Activities
Inflow from customers
Less: Disc on
Note
Total Liabilities
Stockholders’
Equity
Retained Earnings
Total liab. & stck.
equity
Outflow for expenses
Net cash inflow from operating
activities
$10,00
0
Investing activities
$12,000
(8,000)
4,000
0
(150)
$9,850
3,250
$13,10
0
Financing activities
Inflow from creditors
Net change in cash
Plus: Beginning cash balance
Ending cash balance
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9,100
13,100
0
$13,100
9-48
Accounting Events Affecting Year 2:
Repaying a Discount Note
• Event 1: Beacon recorded an adjusting entry to recognize
interest accrued since Dec. 31.
$900 Discount/12 months = $75
$75 x 2 months = $150
Account Title
Debit
Interest Expense
Credit
150
Discount on Notes Payable
Assets
Cash
n/a
Liab.
=
=
Note
Pay.
n/a
+
+
Disc.
on N/P
(150)
+
150
Stockholders' Equity
Common
Stock
n/a
+
−
Retained
Earnings
Revenue
Expense
(150)
n/a
150
=
Net
Income
(150)
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Cash Flow
n/a
9-49
Repaying a Discount Note
• Event 2: Beacon repaid the face value of the discounted note.
Account Title
Debit
Notes Payable
Credit
10,000
Cash
Assets
Cash
(10,000)
+
+
Land
n/a
10,000
=
Liab.
+
=
Notes
payable
+
=
(10,000)
+
Stockholders' Equity
Common
Stock
+
n/a +
Retained
Earnings
n/a
−
Revenue
n/a
Expense
−
n/a
=
=
Net
Income
n/a
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Cash Flow
(900)
(9,100)
OA
FA
9-50
Recognize Cash Service Revenue
• Event 3: Beacon recognized $13,000 of cash service revenue.
Account Title
Debit
Cash
Credit
13,000
Service Revenue
Assets
Cash
13,000
+
Land
n/a
=
Liab.
=
Notes
payable
+
n/a
+
+
13,000
Stockholders' Equity
Common
Stock
n/a
+
Retained
Earnings
+
13,000
−
Revenue
13,000
Expense
−
n/a
=
Net
Income
13,000
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Cash Flow
13,000
OA
9-51
Recognize Cash Operating Expenses
• Event 4: Beacon incurred $8,500 of cash operating expenses.
Account Title
Debit
Operating Expenses
Credit
8,500
Cash
Assets
Cash
(8,500)
+
Land
n/a
8,500
=
Liab.
=
Notes
payable
+
n/a
+
+
Stockholders' Equity
Common
Stock
n/a
+
Retained
Earnings
+
(8,500)
−
Revenue
n/a
Expense
−
8,500
=
Net
Income
(8,500)
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Cash Flow
(8,500)
OA
9-52
Exhibit 9.8: Panel A & B – Transactions and Ledger
Accounts
Panel A: Transaction Summary
1. Recognized accrued interest for Year 2.
2. Paid face value of note.
3. Recognized revenue.
4. Recognized operating expenses.
Panel B: General Ledger
Assets
=
Liabilities
Cash
Notes Payable
Bal. 13,100 10,000 (2)
(2) 10,000
10,000 Bal,
(3) 13,000
8,500 (4)
0 Bal.
+
Equity
Retained Earnings
3,250 Bal.
4,350 (cl.)
7,600 Bal.
Bal. 7,600
Discount on Notes Payable
Bal. 150 150
(1)
Bal.
0
Service Revenue
(cl) 13,000
13,000 (3)
0 Bal.
Operating Expenses
(4) 8,500
8,500 (cl)
Bal. 0
Interest Expense
(1) 150
150 (cl)
Bal. 0
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9-53
Exhibit 9.8: Panel C — Financial Statements
Year 2, Income Statement
Service Revenue
$13,000
Operating Expenses
(8,500)
Operating Income
4,500
Interest Expense
(150)
Net income
$4,350
12/31/Yr. 2 Balance Sheet
Assets
Cash
Total assets
Liabilities
Stockholders’ Equity
Retained Earnings
Total liab. & stck.
equity
$7,600
$7,600
$
0
7,600
$7,600
Yr. 2 Statement of Cash Flows
Operating Activities
Inflow from customers
Outflow for expenses
Outflow for interest
Net inflow from operating
activities
Investing activities
Financing activities
Outflow to creditors
Net change in cash
Plus: Beginning cash balance
Ending cash balance
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$13,000
(8,500)
(900)
3,600
0
(9,100)
(5,500)
13,100
$7,600
9-54
End of Chapter 9
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