In this chapter, you will be able to: Show how notes payable and related interest expense affect financial statements; show how sales tax liabilities affect financial statements; define contingent liabilities and explain how they are reported in financial statements;. | Chapter Seven Accounting for Liabilities © 2015 McGraw-Hill Education. 1 Accounting for Notes Payable 09/01/14 Borrowing On September 1, 2014 Herrera Supply Company (HSC) borrowed $90,000 from the National Bank. HSC issued a note payable due in one year with an annual interest rate of 9%. 7-2 2 Accrual of Interest Expense 12/31/14 Recognition of Interest Expense At the end of 2014, HSC must accrue interest on its note payable. $90,000 × 9% × 4/12 = $2,700 interest expense 7-3 3 Paying principal & interest at maturity date 08/31/15 Recognition of interest expense. Payment of principal and interest on the maturity date, August 31. $90,000 × 9% × 8/12 = $5,400 interest expense Now, record payment of principal and interest payable. 7-4 4 Accounting for Sales Tax Most states require retail companies to collect sales tax on items sold to their customers. The retailer then remits the tax to the state at regular intervals. Sales tax is a liability to the retailer until paid to the state. HSC | Chapter Seven Accounting for Liabilities © 2015 McGraw-Hill Education. 1 Accounting for Notes Payable 09/01/14 Borrowing On September 1, 2014 Herrera Supply Company (HSC) borrowed $90,000 from the National Bank. HSC issued a note payable due in one year with an annual interest rate of 9%. 7-2 2 Accrual of Interest Expense 12/31/14 Recognition of Interest Expense At the end of 2014, HSC must accrue interest on its note payable. $90,000 × 9% × 4/12 = $2,700 interest expense 7-3 3 Paying principal & interest at maturity date 08/31/15 Recognition of interest expense. Payment of principal and interest on the maturity date, August 31. $90,000 × 9% × 8/12 = $5,400 interest expense Now, record payment of principal and interest payable. 7-4 4 Accounting for Sales Tax Most states require retail companies to collect sales tax on items sold to their customers. The retailer then remits the tax to the state at regular intervals. Sales tax is a liability to the retailer until paid to the state. HSC sells merchandise to a customer for $2,000 cash in a state where the sales tax rate is 6%. 7-5 5 Accounting for Sales Tax Remitting the tax (paying cash to the state tax authority) is an asset use transaction. 7-6 6 Reporting Contingent Liabilities 7-7 7 Warranty Obligations To attract customers, many companies guarantee their products or services. Within the warranty period, the seller promises to replace or repair defective products without charge. Event 1 Sale of Merchandise HSC sells $7,000 of merchandise for cash. The merchandise had a cost of $4,000. 7-8 8 Warranty Obligations Event 2 Recognition of Warranty Expense HSC estimates that warranty expense associated with the current sale will be $100. 7-9 9 Warranty Obligations Event 3 Settlement of Warranty Obligation HSC pays $40 cash to repair defective merchandise returned by a customer. 7-10 10 Financial Statements Sales Revenue 7,000 $ Cost of Goods Sold (4,000) Gross Margin 3,000 Warranty Expense (100) Net Income 2,900 $ .
