Question

Consider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year).

1. A business sets up a line of credit with a supplier. The company purchases $10,000 worth of equipment on credit. Terms of purchase are 5/10, n/30.
2. A customer purchases a watering hose for $25. The sales tax rate is 5%.
3. Customers pay in advance for season tickets to a soccer game. There are fourteen customers, each paying $250 per season ticket. Each customer purchased two season tickets.
4. A company issues 2,000 shares of its common stock with a price per share of $15.

Answer 1

Determination of liability to be recognized and the amount to be recognised in current year:-

1. This transaction is a "Credit purchase-Asset" transaction that is a liability for the business and whole $10,000 worth of purchases has to be shown under liability in the current year.

2. This is a purchases transaction and considering the payment is made up front, no liability would be recorder but there would be a reduction in the current assets (cash/ bank) for $25+5% tax and there would be addition to fixed assets for the same amount.

3. This is a type of advance payment receipt and would be recorded under “Advance sales receipt” under liabilities and the same has to be booked under sales when the even triggers. This $500 has to be treated as advance receipt.

4. Issue of stock is considered to be Equity share capital by the company and thus would reflect on the liability side of the balance sheet under “Share capital” of 2,000 X $15 ie $30,000