Homework – Ch 7

Complete the attached homework for Ch 7 we will review it at the start of class prior to starting on Ch 8. Be sure to show your work, and also be sure to do your own work.

Name _______________________________________
ACCT 223 – Spring 2024
Homework – Chapter 7
Fill in the blank with the correct answer from the textbook.
1. A current liability that represents cash collected in advance of earning the
related revenue is called ____________________________________________.
2. Amounts owed to suppliers for goods and services that have been provided to
the entity on credit are called ______________________________________.
3. The portion of long-term debt that is to be paid within one year of the balance
sheet date is reclassified from the non-current liability section of the balance
sheet and called ______________________________________________________.
4. Total wages earned by employees for a payroll period including bonuses and
overtime are called _______________________. From this amount, deductions and
withholdings are subtracted to arrive at the _____________________________, which
is the amount recorded on the company’s balance sheet as a wages payable.
5. In order for a contingent liability to be recorded in a company’s balance sheet,
it must be both _________________________ and ____________________________.
6. When a bond’s stated rate is lower than the market rate, the bond is issued at a
______________________________. When a bond’s stated rate is higher than the
market rate, the bond is issued at a ______________________________.
Complete the problems, and show your work.
7. On Jan 1, 2023, Kayce Co. obtained a 6-month loan from its bank for $4,000,000
with an interest rate of 5%. Calculate the total interest expense due.
8. Dutton Inc. has the following payroll information for the year ended 12/31/23.
FICA is calculated at 7.65% of gross pay. Calculate the missing information.
Gross pay
FICA tax withholdings
Income tax withholdings
Group health insurance
Employee 401K contributions
Total deductions
Net pay
$400,000
?
$30,000
$9,400
?
$80,000
?
9. On January 1, 2023, $2 million worth of 4-year bonds with a stated rate of 6%
were issued; interest is paid semi-annually on June 30th and Dec 31st. The market
interest rates were 5% when the bonds were issued.
a. Calculate the annual interest payment on the bonds.
b. Calculate the amount of interest paid on each semi-annual payment.
c. Calculate the total amount of interest to be paid over the 4 years.
d. Were the bonds issued at a premium or a discount?
10. On January 1, 2023, $10 million worth of 5-year bonds with a stated rate of 5%
were issued; interest is paid quarterly on March 31, June 30th, Sept 30th, and Dec
31st. The market rates were 7% when the bonds were issued.
a. Calculate the annual interest payment on the bonds.
b. Calculate the amount of interest paid on each quarterly payment.
c. Calculate the total amount of interest to paid over the 5 years.
d. Were the bonds issued at a premium or a discount?
Chapter 7
Accounting for and Presentation of
ST & LT Liabilities
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
LO 1
Nature of Liabilities
◼ Liabilities are obligations that represent
“probable future sacrifice of economic
benefits.”
◼ The term accrued expenses is often used
on the balance sheet to describe liabilities.
◼ Current liabilities (ST) are those liabilities
that will be paid within one year of the
current balance sheet date. Non-current
(LT) liabilities will be paid after one year.
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LO 1
Examples of Liabilities
Current (ST) liabilities include:
• Accounts payable
• Short-term debt (notes, bonds payable)
• Current maturities of long-term debt
• Unearned revenue or deferred credits
• Other accrued liabilities (interest, wages, taxes)
Noncurrent (LT) liabilities include:
• Long-term debt (bonds & notes payable)
• Deferred tax liabilities
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Current Maturities on
Long-Term Debt
LO 2
Any portion of long-term debt that is to be
repaid within a year of the balance sheet date is
reclassified from the noncurrent liability section
to the current liability section under the title,
current maturities of long-term debt.
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LO 2
Interest Calculation Methods
Straight Interest
Interest = Principal × Rate × Time in years
= $20,000 × 0.12 (or 12%) × 1
= $ 2,400 per year or $200 per month
If principal borrowed for 3 months,
Interest expense would be $200 x 3 = $600
or $20,000 x 12% x 3/12 = $600
Annual Percentage Interest Rate (APR)
APR = Interest Paid ÷ Money available × Time
= $2,400 ÷ $20,000 × 1
= 12% (or 0.12)
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1-6
Unearned Revenue or
Deferred Revenue
LO 3
Unearned revenue is created when customers pay for
services or products before delivery.
On January 1, 2019, Matrix, Inc. receives $2,400 cash as
an advance payment one a one-year building lease. A
$2,400 accrued liability is booked on Jan 1st, as Matrix
owes
the customer $2,400 of building space (for 1 year).
Cash
received
for one-year
subscription
1/1/13
< – – – – –12-month lease – – – – – >
1/31/13
Month end
2/28/13
Month end
3/31/13
Month end
Our goal is to recognize $200 of
revenue per month as the lease is
used up, reducing the liability.
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1-7
LO 3
Unearned Revenue or
Deferred Revenue (cont’d)
Unearned revenue is created when customers pay for
services or products before delivery.
Each month, $200 ($2,400 / 12 months) of the revenue is
booked, and at the same time $200 of the offsetting
accrued liability is reduced.
Cash received
for one-year
subscription
1/1/13
< – – – – –12-month lease – – – – – >
1/31/13
Month end
2/28/13
Month end
3/31/13
Month end
The accrued liability of $2,400 is
booked on Jan 1st, and will reduce by
$200 each month to $0 on Dec 31st.
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LO 3
Unearned Revenue or
Deferred Revenue (cont’d)
Month
Jan
Feb
Mar
Apr
May
June
Cash received
July
for one-year
Aug
subscription
Sept
Oct
Nov
Dec
McGraw-Hill/Irwin
Beg Liability
$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
Reduction
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
(200)
$
End Liab
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Revenue
Earned
200
$
400
$
600
$
800
$
1,000
$
1,200
$
1,400
$
1,600
$
1,800
$
2,000
$
2,200
$
2,400
$
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Payroll Deductions
◼ Gross Pay less deductions = Net Pay
◼ FICA tax 7.65% (Soc. Sec. & Medicare)
◼ Federal income taxes
◼ State income taxes
◼ FUTA & SUTA taxes (unemployment)
◼ Voluntary deductions:
◼ Health insurance (& vision, dental, life, etc)
◼ Retirement (401K, 403B)
◼ Charitable contributions (United Way, etc)
◼ Involuntary deductions:
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Payroll Deductions
(cont’d)
◼ Gross Pay less deductions = Net Pay
◼ $40,000 Gross Pay
◼ -$15,000 Deductions (withholdings, taxes)
◼ $25,000 Net Pay
◼ $25,000 Net Pay booked as ST Liability:
◼ Wages Payable, Salaries Payable, etc.
◼ $15,000 Deductions booked as ST Liab:
◼ Payroll Withholdings Payable, Fed Inc Tax Liab,
State Inc Tax Liab, FICA Tax Liab, etc.
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Noncurrent Liabilities
LO 6
Long-Term Debt
Interest payments on debt are an
expense on the Inc Statement
(Interest Exp)
Principal payments are not an
expense, they reduce the Liability
on the Balance Sheet
Long-term debt can include mortgage payable,
bonds payable, notes payable, etc.
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LO 7
Bonds Payable – Terminology
Interest 10%
6/30 & 12/31
Face Value $1,000
BOND PAYABLE
Maturity Date 12/31/17
Bond Date 1/1/13
Face value is the amount an investor will receive at maturity.
Bond date is the date the bond was issued.
Stated interest rate is typically an annual rate.
Interest payment dates are dates when an investor is paid interest.
Maturity date is the date when the face value of the bond is
repaid to an investor.
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LO 8
Issuance of Bonds Payable at
a Discount or a Premium
Market Rate Effect of Bond
Selling Prices
Above the market rate
A premium
Equal to the market rate
Face amount (at par)
Below the market rate
A discount
In the previous example, par value was illustrated
because the Stated Rate was equal to the Market Rate
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Bonds Payable
◼ Bonds Issued at a Premium:
◼ Market interest rate less than Bond’s stated
interest rate (investors are willing to pay a
premium, such as 102% or 101%)
◼ Bonds Issued at a Discount:
◼ Market interest rate higher than Bond’s stated
interest rate (investors will only buy at a
discount, such as 98% or 99%)
◼ Investor received regular interest
payments & face value at bond maturity
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LO 9
Other Noncurrent Liabilities
Obligations relating to pension plans and other
employee benefit plans, including deferred
compensation and bonus plans.
Expenses relating to these
plans are accrued and
reflected in the income
statement of the fiscal
period in which the benefits
are earned by the
employees.
McGraw-Hill/Irwin
Some companies pay
postretirement
benefits. Postretirement
benefits are measured
in a different manner.
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LO 10
Other Noncurrent Liabilities
Contingent Liabilities
Potential claims on the resources of a
company arising from pending litigation,
environmental hazards, casualty losses to
property, product warranties, or unsettled
disputes with the Internal Revenue Service.
If a potential liability is Probable and
Estimable, it must be booked as a liability,
otherwise a f/s note describing the issue is
sufficient
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End of Chapter 7
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