Chapter+11+Notes+-+Current+Liabilities

__**SO 1 - 2; SO 7**__ Homework: SS5, SS6; BE11-1, BE11-3, BE11-4, BE11-5; SS13; P11-9A (a) (b) Highlights: **current liabilities** are debts that are both (a) due within one year or the operating cycle (i.e., cash conversion cycle), whichever is longer, and (b) paid from existing current assets or creation of new current liabilities

- current liabilities may be classified as either:

(i) **definitely determinable** (no uncertainty as to existence, amount, payee or due date, e.g., lines of credit, notes payable, accounts payable, unearned revenues, current portions of long-term debt, accrued sales taxes, accrued interest payable, payroll deductions, employee benefits) (ii) **estimable** (amount or due date must be estimated, e.g., property taxes, product warranties) or (iii) **contingent** (potential debt dependent on future event confirming existence, amount or due date, e.g., pending lawsuits)


 * note: we will only be discussing __definitely determinable__ current liabilities in this course**


 * __(i) Definitely determinable current liabilities__**

(a) **operating line of credit** - most firms maintain an operating line of credit at their banks to manage temporary cash shortages - line of credit represents pre-approved right to borrow money from bank up to preset limit whenever necessary - interest rate on line of credit is usually set at **prime rate of interest** (floating interest rate charged by banks to best customers, currently 3.45% in Canada) **plus some preset figure** (e.g., prime plus 1 per cent) - collateral or security (assets used to guarantee loan) must be put up by borrower to protect against default - most loans secured on line of credit must be repaid upon request by bank (known as **demand loan**) - lines of credit may either take the form of (i) traditional loans or (ii) overdraft protection on cheques written in excess of current bank balance - negative or overdrawn bank balances resulting from use of line of credit appear on balance sheet as // bank indebtedness, bank overdraft // or // bank advances // under current liabilities

(b) **notes payable** represent debt obligations in the form of written promissory notes or IOU's - notes payable provide enhanced evidence of indebtedness as they are essentially legal contracts entered into by lender and borrower - notes payable may be used to secure traditional loans or purchases on account - notes due within one year are recorded as current liabilities at time of advance (Cash dr, Notes Payable cr) or (Supplies dr, Notes Payable cr) - most notes are expressed at face value (principal/amount borrowed) plus fixed annual interest rate over specified term (e.g., $1,000 note, 3% interest, 6 month term) - interest on note is treated as an expense of the business and accrues over time - accrued interest must be journalized at end of each fiscal period (Interest Expense dr, Interest Payable cr) - interest and principal is usually payable upon maturity, i.e., at end of term

Company A borrows $10,000 and signs a three-year, 6% $10,000 note on September 1 representing the loan. Fiscal year end is December 31. Record the issuance of the note and the accrued interest owing as of fiscal year end:
 * __Example of issuance of note payable and calculation of accrued interest__**

1 Cash 10,000 ............. Note Payable 10,000 To record issuance of note payable on $10,000 loan

31 Interest Expense 200 .................. Interest Payable 200 To record accrued interest from September 1 to December 31 (//$10000 x 6% x 4/12//)

(c) **federal and provincial sales taxes** (GST/PST or 13% HST in Ontario) must be charged on all sales transactions and remitted (returned) to the appropriate government agency monthly or quarterly (e.g., **Cash dr, Sales cr, HST Payable cr**) - GST/HST due to federal government may be offset against GST/HST paid by business on all its purchases (known as input tax credits or GST/HST Recoverable) - net GST/HST must be delivered to Receiver General of Canada, PST must be delivered to provincial Minister of Finance - sales taxes are not treated as expenses of the business as seller essentially acts on tax collector on behalf of government

(d) **unearned revenues** represent **customer payments received in advance of the provision of goods or services** and must be recorded as a current liability at time of prepayment, i.e., Unearned Revenue - common examples of unearned revenue include prepaid magazine subscriptions and season ticket purchases - each time revenue is earned, additional accounting entry is required

15 Cash - 10,000 ................. Unearned Ticket Revenue - 10,000 To record sale of 10-game season ticket packages

28 Unearned Ticket Revenue - 1,000 ........................................ Ticket Revenue - 1,000 To record one game of ticket revenue earned

(e) **current portion of long-term debt** (e.g., Bank Loan or Long-term Note Payable) due within one year must be listed as current liability on balance sheet at end of each fiscal period

(f) **employee payroll deductions/****withholdings** (//see SO 7//) - executives, managers and senior staff typically earn **annual salaries** (e.g., $80,000/yr) while junior staff and part-timers traditionally earn **hourly wages** (e.g., $11.25/hr) - salaries and wages represent expenses of the firm that must be journalized as liabilities at end of fiscal period if still unpaid, i.e., due and payable

- employee payroll deductions/withholdings (**federal and provincial income taxes, Canada Pension Plan [CPP] contributions, Employment Insurance [EI] premiums, union dues, extended health and dental premiums, charitable donations, etc.**) refer to __mandatory__ (and sometimes optional) payments by __employees__ that __employers__ are required by law to withhold (deduct from gross pay) and then submit on employees' behalf to appropriate government agency or other organization - these withholdings must be journalized as liabilities (and not as expenses) until remitted to appropriate government agency or other organization

31 Salaries and Wages Expense - 10,000 (//gross pay - 50 hrs x $20/hr)// ............................. Salaries and Wages Payable - 6,000 //(net pay/take home pay)// ............................. Income Taxes Payable - 2,400 ............................. CPP Payable - 750 ............................. EI Payable - 230 ............................. Dental Premiums Payable - 600 ............................. Union Dues Payable - 20 To record payroll and **employee payroll deductions**

1 Salaries and Wages Payable - 6,000 ................................................ Cash - 6,000 To record payment of net pay to employees

15 Income Taxes Payable - 2,400 .... CPP Payable - 750 .... EI Payable - 230 .... Dental Premiums Payable - 600 .....Union Dues Payable - 20 ................................................. Cash - 4,000 To record remittance of payroll withholdings to appropriate organization or government agency

(g) **employer payroll costs/employee benefits** (//see SO 7//) - in addition to withholding various employee payroll deductions, Canadian employers are required by law to **match their employees' CPP contributions equally (1:1)** and **contribute 1.4 times their employees' EI premiums** to federal government - Canadian employers must also contribute to provincial workers' compensation programs (known in Ontario as **Workplace Safety and Insurance Board** or **WSIB**) which fund compensation of employees injured in workplace accidents - Canadian employers must also provide **mandatory 4%** **vacation pay** (on gross pay) to their employees and sometimes may even contribute to **optional employer-sponsored pension plans and extended health and dental plans** - these **employer payroll costs** are known collectively as ** employee benefits ** and represent expenses to the business that must be recorded as current liabilities until remitted to the appropriate government agency or other organization (or to the employee him/herself in the case of vacation pay)

- **please note that** **unlike employee payroll deductions, these employer payroll costs come out of the employer's own pocket**

31 Employee Benefits Expense - 1,600 ........................................... CPP Payable - 750 ........................................... EI Payable - 322 ........................................... WSIB Payable - 64 ........................................... Extended Health Care Premiums Payable - 64 ........................................... Vacation Pay Payable - 400 To record **employer payroll costs**

1 Vacation Pay Payable - 400 .................................. Cash - 400 To record payment of vacation pay to employees

15 CPP Payable - 750 .....EI Payable - 322 .....WSIB Payable - 64 .....Extended Health Care Premiums Payable - 64 ....................................................................... Cash - 1,200 To record payment of employer payroll costs to appropriate government agency