Ch 9 Current Liabilities Flashcards
Breakage Income
represents the estimated value of gift cards that is not expected to be redeemed by customers and is determined in proportion to the pattern of rights exercised by the customer
common current liabilities
1) bank indebtedness (or line of credit)
2) short-term loans
3) current portion of long-term debt
Current liabilities are recorded at their _______ value
a) present value
b) face value
b) face value since the difference between fair value and the present value is so small it’s immaterial
Bank indebtedness
the first current liability you will see on a B/S.
It’s the amount borrowed on the established line of credit with the bank and that will be repaid with the subsequent cash deposits that the company makes to the account.
When a company runs out of cash in the account, they can still keep writing checks by using that line of credit much like a set-up overdraft facility on personal bank accounts.
Revolving credit facilities
An agreement a company enters into with its bank, enabling it to borrow up to a negotiated limit. The company can use the credit facility as needed and repay it as funds are available.
Standby fees
fees (interest charged) that a company has for just having a line of credit even if the company doesn’t use the line of credit. The line of credit is usually secured by receivables and inventory, so the limit on the line of credit is dependant on those assets and will fluctuate with them.
Blended instalment payments
partial payments of a loan (principal and interest)
Current portion of long term debt
A part of a long term debt that must be repaid this year, since they meet the definition of a current liability, they will be presented on B/S as such
Journal entry for current portion of a long term debt
(how to move it to current portion - reclassification entry)
Long term loan payable XXX
Current portion of long term debt XXX
Current liabilities arising from trade with suppliers
known as trade receivable or trade account receivables
aka “free debt” as there is no interest rate if paid in time (usually 30-60 days but it varies dependant on industry), there are also sometimes discounts for early repayments of these
Current liabilities arising from trade with customers
1) deferred revenue
2) gift card liability
3) customer loyalty provision
4) provision for warranty claims
Provision
means that the liability was estimated
partially executed contract
a customer has paid a downpayment/deposit/retainer or just some part of a good or service that has not been delivered yet. That creates a partially executed contract that will create deferred or unearned revenue liability on a B/S. It’s inappropriate to record those as revenue beef they have been earned
deferred revenue journal entry
Cash XXX
Deferred Revenue XXX
after earning the revenue journal entry (gym membership example)
Deferred Revenue XXX
Membership Revenue XXX
Initial purchase of gift card journal entry
Cash XXX
Deferred revenue (or gift card liability) XXX
Usage of gift card (redemption)
Deferred revenue (or gift card liability) XXX
Sales Revenue XXX
COGS XXX
Inventory XXX
2 types of warranty
assurance warranty
service warranty
Assurance warranty
aka basic warranty that states that the product will work as expected and will not break (assurance that it doesn’t have any defects)
Service warranty
aka extended warranty that can be purchased separately from the good; allows you to come back and have the good fixed or replaced
Service type of warranty
recognized as a performance liability and sales of it will be recognized as deferred revenue until it’s used
Which type of warranty does not result in separate performance obligations?
Assurance type of warranty
Since assurance type of warranty can incur costs after the sale, a ___________ is recorded along with a _____________
1) warranty expense
2) warranty provision liability
The journal entry for warranty provision for assurance type of warranty
Warranty expense XXX
Warranty Provision XXX
recording of warranty expense and warranty provision on financial statements
Warranty expense is recorded as an expense at the time of the sale and it doesn’t matter how long the actual warranty is. At the same time the warranty provision account will be created.
The part of the warranty provision for the current year will be recorded as a current liability and the rest as a non current liability.
no expense will be incurred when the a customer will come to use the assurance type of warranty, the warranty provision will be used instead.
assurance type of warranty can result in a number of different outcomes such as:
1) product replacement
2) product repair (which may include both parts and labour)
3) product returned;
4) cash refund provided
5) product returned;
6) store credit or gift card provided
7) warranty period expires without any claims
Journal entry for the assurance type of warranty
Warranty Provision
XXX
Inventory
XXX ⟶ If product replaced
or
Inventory and/or Wage Expense
XXX ⟶ If product repaired
or
Cash
XXX ⟶ If refund provided*
or
Deferred Revenue
XXX ⟶ If store credit provided
or
Miscellaneous Revenue
XXX ⟶ If warranty period expired
*This assumes that the product returned cannot be sold to another customer.
For service-type warranties, the warranty expense is recorded ________________________ While there is no warranty provision recorded for service-type warranties, there is ___________________________________________________
1) in the period in which warranty claims are made.
2) a liability for the deferred warranty revenue for the warranty-related performance obligations that remain outstanding.
why are the expenses and revenues related to the same sale are recorded at the same time?
In this way, the statement of income provides a better indication of the profitability of that period’s operations.
Benefits
Medical pay, vacation pay, etc. must be recognized as an expense when hit is incurred but there should also be a corresponding liability.
Source deductions
Amounts withheld from employee wages and remitted to the government by the employer to pay for such things as income taxes, Employment Insurance, and government pension premiums.
Gross wages
the wages earned by the employee
Net wages
wages that will be paid to the employee
Employee Entry
Wage expense XXX
Employee Income Taxes payable XXX
CPP Payable XXX
EI Payable XXX
Wages payable (or cash if paid at this time). XXX
Employer Entry
This entry accounts for the employer’s share of CPP and EI
Wages expense XXX
CPP (same as the employee’s share) XXX
EI (1.4 times the employee’s share) XXX
payment of wages entry
Wages payable XXX
Cash XXX
Remittance
The payment of employee source deductions, together with the employer’s share, to the federal or other government.
Remittance entry
Employee Income Taxes Payable XXX
CPP (both the employee’s and employer’s shares) XXX
EI (both the employee’s and employer’s shares) XXX
Cash XXX
when are the companies supposed to remit the amounts owed?
Most companies are required to remit the amounts owed related to their source deductions by the 15th of the month following the month in which they were withheld from employees. Large employers make their remittances weekly.
Corporate tax return
An annual filing required of corporations by the federal government to determine the amount of corporate income tax owed. Synonym for T2.
Income taxes payable
presented as income taxes payable and is a current liability
income tax must be payed within the 2 months before the war end
and the corporate tax return must be done in the 6 months after the year end
income taxes payable is different from deferred income taxes
Journal entry for declaring dividends
Dividends Declared XXX
Dividends Payable XXX
Accounts payable turnover ratio
measures the number of times per year that a company settles its trade payables
(credit purchases)/(average accounts payable)
Accounts payable payment period
the average number of days a company takes to pay its trade payables
365/(Accounts payable turnover ratio)
finding cost of goods sold using inventory
Beginning Inventory
+ Purchases
- Ending Inventory
________________________
COGS
Finding purchases using cogs and inventory
COGS
- Beginning Inventory
+ Ending Inventory
_________________________
Purchases
