current liabilities

CHAPTER 12

CURRENT LIABILITIES AND PAYROLL ACCOUNTING

1.   ACCOUNTING FOR CURRENT LIABILITIES

Acurrent liability is a debt can reasonably is expected to be paid:

1.         From existing current assets or through the creation of other current liabilities

2.         Within one year or the operating cycle,whiches is longer.

Companies most carefully monitor the relationship of current liabilities of current assets. A company that has more current liabilities than current assets is usually the subject of some conceren because the compact may no be ables to meet is current obligations when they become due.

2   NOTES PAYABLE

Notes are issued for varying periods. Those due for payments within one year of the balance sheet date are usually classified as current liabilities.

Example :

Fist Nasinal Bank agrees to lend $ 100.000 on March 1,1999. If cole Williams Co. signs a $ 100.000,12%, 4 mounth note. With an interest-bearing promissory note,the amont of assets received upon issueance of the not generally equals the note’s face value. So the journal enty is :

1-Mar	Cash		100,000
	Notes Payable			100,000
100,000
	( To record issuance of 12%,4 month note
	to first National Bank)

If cole Williams Co prepare financial statement semiannually,an adjusting entr is required to recognize interest expense and interest payable of $ 4000 ($ 100,000 X 12% X 4/12) at June 30. The adjusting entry is :

30-Jun	Interest Expense		4000
	Interest payable			4000
	(To accure interest for 4 mount on
	firs national Bank note )

At maturity (july 1),cole William Co. must pay the face value of the note ($100.000) plus $4000 interest ($ 100.000 X 12% X 4/12). Th entry to resocd is :

July 1	Notes Payable	100.000
	Interest Payable	4000
	Cash		104.000
	(To record payment of first national Bank interest bearing note and accrued interest at matury)

Sales Tax Payable

As consumers, we are well aware that many of the products we purchase at retail stores are subject to sales tax. The tax is expressed as a stated percentage of the sales price. The retailer (or selling company)collects the tax from the customer when the sale occurs,and periodically (usually monthly) remits the collections to the state’s department of revenue. Thus, the amount tax from purchaser to remits the state’s department rever to saller Is payable to state department. Its name is value added tax.

Unearned revenue

Sometime accompanies receive prepayment of products which the delivery will do next time.  The companies account for unearned revenue that are received before goods are devered or service are :

1.      When the advance is received. Cash is debited,and current liability account identifying the source of the unearned revenue is credited.

2.      When the revenue is earned. The unearned revenue account is debited,and an earned revenue account is credited.

Exemple.

Superior University sells 10.000 seoson footboll tickets at $ 50 each for its five game home schedule. The entry for the sales of season tickets is ;

Agst 6	Cash		500.000
	Unearned football ticket revenue			500.000
	(To record sale of 10.000 season tickets)

As each game is completed,the following entry is made :

Agst 6	Unearned football ticket revenue		100.000
	football ticket revenue			100.000
	(To record football ticket revenue earned)

Therefore,unearned revenue and is reported as current liability in the in the balance sheet. As revenue is earned,a transfer from unearned revenue to earned occus.

Current Maturities of Long-Term Debt

Companies often have a portion of long term debt that comes due in the current year. For example, assume that Wendy Construction issues a 5 year interest-bearing $ 25000 note on January 1 1999. This note specifies that each January 1,2000 $ 5000 of the note should be paid. When financial statement are prepared on December 301,1999 $ 5000 should be reported as a current liability and $ 20.000 as a long term liability. Current maturities of long term debt are often identified on the balance sheet as long term debt due within one year.

REPORTING OF CURRENT LIABILITIES ON THE BALANCE SHEET

current liabilities are the first category under liabilities on the balance sheet.each of the principal types of current liabilities is listed separately within the category.in addition,the term  of notes payable and other pertinent information concerting the individual items are disclosed in the notes to the financial statements

Current liabilities are seldom listed in the order of maturity because of the verying maturity dates that may exist for specific obligations such as notes payable. A more common,and entirely satisfactory,method of presenting current liabilities is to list them by order of magnitude,with the largest obligations first.many companies,as a matter of custom,show notes payable and accounts payable first, regardless of amount.the following adapter expert from the balance sheet of kellog company illustrates this practice.

KELLOG COMPANY
BALANCE SHEET
DECEMBER 31,1997
ASSET
CURRENT ASSET	$ 1.467,7
PROPERTY,PLANT AND EQUIMENT (NET)	$ 2.773,3
IDENTIFIABLE ITANGIBLE ASSETS AND GOODWILL	$ 636,6
TOTAL ASSET	$ 4.877,6
LIABILITIES AND STOCLHOLDER'S EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT	$211.20
NOTES PAYABLE	368.6
ACCOUNTS PAYABLE	328
OTHER CURRENT LIABILITIES	749.5
TOTAL CURRENT LIABILITIES	1652.3
NONCURRENT LIABILITIES	2.222,8
STOCKHOLDER'S EQUITY	997.5
TOTAL LIABILITIES AND STOCLHOLDER'S EQUITY	4877,6