liabilities

Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

1


22

LiabilitiesChapter 9


3

Account for current liabilities and contingent liabilities


4

Current Liabilities

•Obligations due within one year•Two types:

▫Known amounts▫Estimated amounts


5

Current Liabilities: Known Amount


6

Current Liabilities: Known Amount•Accounts payable

▫Amounts owed for products or services purchased on account

Accounts payable turnover

Cost of goods sold

Average accounts payable

Days payable

outstanding

365Accounts payable turnover


7

Short-term notes payable

•Due within one year•Used to borrow cash or purchase asset•Accrue interest


8

Accounting for Short-Term Notes Payable

JOURNAL

Date Accounts and explanation Debit Credit

Dec 1 Inventory 30,000

Note Payable, Short-Term 30,000

Purchase of inventory by issuing a 3-month, 9% note payable.

Dec 31

Interest expense 225

Interest payable 225

Accrued interest on note payable.

(30,000 × 9% × 1/12)


9

Accounting for Short-Term Notes Payable

JOURNAL


Mar 1 Note payable, short-term 30,000

Interest payable 225

Interest expense (30,000 x 9% x 2/12) 450

Cash 30,675

To record payment of note payable and interest at maturity.


10

Sales Tax Payable

•Levied on retail sales•Collected from customers and remitted to

state

JOURNAL


Cash 105,000

Sales Revenue 100,000

Sales Tax Payable 5,000

To record cash sales and the related sales tax.


11

Accrued Liabilities

•Result from expenses incurred but not yet paid

•Categories:▫Salaries and Wages Payable▫Interest Payable▫Income Taxes Payable


12

Payroll

• Major expense of most companies• Many different forms:

▫ Salary▫ Wage▫ Commission

JOURNAL


Salary Expense

Employee Income Taxes payable

FICA Taxes Payable

Salary Payable to Employees

To record sales expense.


13

Payroll Liabilities


14

Unearned Revenues

•Business receives cash before earning revenue

•Results in a liabilityJOURNAL


Cash

Unearned Revenue

Received advance payment from customer.

Unearned Revenue

Revenue

To record earned portion of unearned revenue.


15

Exercise 9-17AJOURNAL


Oct 1 Cash 2,616

Unearned Subscription Revenue 2,400

Sales Tax Payable 216

Received subscription fees in advance.

Nov 15 Sales Tax Payable 216

Cash 216

Remitted sales tax.

Dec 31 Unearned Subscription Revenue 600

Subscription Revenue ($2,400 ×3/12)

600

Earned revenue that was collected in advance.


16

Current Portion of Long-Term Debt•Long-term debt often paid in installments•Amount of principal payable within one

year•Company reclassifies amount from long-

term to current


17

Estimated Current Liabilities


18

Estimated Warranty Payable

•Warranty expense is estimated in the year product is sold▫Matching principle

JOURNAL


Warranty Expense


To accrue warranty expense.


Inventory

To replace defective parts under warranty.


19

Contingent Liabilities

•Potential liability that depends on future outcome of past events


20

Account for bonds payable, notes payable and interest expense


21

Long-Term Liabilities


22

Bonds Payable

•Debts of issuing company•Bond certificate states:

▫Company name▫Principal▫Maturity date▫Interest rate▫Interest payment dates


23

Types of Bonds


24

Bond Prices

•Quoted as percent of maturity valuePremium Discount

Price above face Price below face

Credit balance Debit balance

Market price decreases towards maturity value

Market price increases towards maturity value

At maturity

dateFace value

Marketvalue


25

Interest Rates & Bond Prices

•Bonds always sold at market price▫Bond’s present value

•Two interest rates set bond price▫Stated interest rate (coupon rate)

Printed on bond certificate Determines cash interest paid to bondholders

▫Market interest rate (effective interest rate) Demanded by investors for loaning money Varies minute to minuteStated rate usually differs from

market rate


26

Issue Price of Bonds Payable

Case A

Stated interest rate

= Market interest rate

Therefore, Issued at Par

Case B


< Market interest rate

Therefore, Issued at Discount

Case C


> Market interest rate

Therefore, Issued at Premium


27

Issuing Bonds Payable at Par

JOURNAL


Cash 100,000

Bonds Payable 100,000

To issue bonds at par.

Interest Expense 4,000

Cash 4,000

To pay semi-annual interest.


28

Issuing Bonds Payable at Par

JOURNAL


Bonds payable 100,000

Cash 100,000

To pay bonds at maturity.


29

Issuing Bonds Payable at a Discount

JOURNAL


Cash 96,149

Discount on bonds payable 3,851

Bonds payable 100,000

To issue bonds at a discount.


30

Balance Sheet Presentation

Balance Sheet

Long-term liabilities:

Bonds payable $100,000

Less: Discount on bonds payable

(3,851) $96,149


31

Semiannual Interest Payment vs. Semiannual Interest ExpenseSemiannualInterest payment

Face value


1/2

SemiannualInterest expense

SemiannualInterest expense

Preceding Bond

Carrying amount

Preceding Bond

Carrying amount

Market

interest rate

Market

interest rate

1/21/2


32

Bond Discount Example

Issue Date January 1, 2012

Face value $100,000


9%

Interest payments Semi-annual

Maturity date January 1, 2017

Market interest rate

10%

Issue price $96,149


33

A B C D E

DateInterest paymen

t

Interest

expense

Discount amortizatio

n

Discount

balance

Bond carrying amount

Jan 1, 2012

$3,851 $96,149

Jun 1, 2012

$4,500 $4,807 $307 3,544 96,456

Jan 1, 2013

$4,500 4,823 323 3,221 96,779

Jan 1, 2017

$4.500 4,961 461 0 100,000


34


35


36

JOURNAL


2012

July 1 Interest Expense 4,807

Discount on Bonds Payable 307

Cash 4,500

To pay semiannual bond interest and amortize discount

Dec. 31

Interest expense 4,823


Interest Payable 4,500

To pay semiannual bond interest and amortize discount.


37

Balance Sheet Presentation

Balance Sheet

Long-term liabilities:

Bonds payable $100,000

Less: Discount on bonds payable

(3,221) $96,779


38

Partial-Period Interest Payments

JOURNAL


Dec. 31

Interest Expense 2,880


Interest Payable 2,667

To accrue interest and amortize discount at year-end.

$96,000 carrying amount x 9% market rate x 4/12

$96,000 carrying amount x 9% market rate x 4/12

$100,000 face value x 8% stated rate x 4/12$100,000 face value x 8% stated rate x 4/12


39

Bond Premium Example

Issue Date January 1, 2012

Face value $100,000


9%

Interest payments Semi-annual

Maturity date January 1, 2017

Market interest rate

8%

Issue price $104,100


40

A B C D E

DateInterest paymen

t

Interest

expense

Premium amortizatio

n

Premium balance

Bond carrying amount

Jan 1, 2012

$4,100 $104,100

Jun 1,2012

$4,500 $4,164 $336 3,764 103,764

Jan 1, 2013

$4,500 4,151 349 3,415 103,415

Jan 1, 2017

$4,500 3,955 545 0 100,000


41


42


43

Straight-Line Method

AmortizationDiscount or premium

Number of interest payments

Interest expenseInterest expense

Amortization

Amortization

Interest paymentInterest payment

OR


44

Retiring Bonds Before Maturity

•Reasons to pay off bonds early▫Can relieve high interest payments ▫Can borrow at a lower interest rate

•Callable feature▫Issuer can pay off bonds at a prearranged

price▫Results in a gain or loss


45

Convertible Bonds and Notes

•Bondholders can exchange bonds for stock

•Investors benefit from:▫Guaranteed receipt of principal and

interest on bonds▫Potential for gains on stock


46

Analyze and differentiate financing with debt vs. equity


47

Financing Operations


48

Earnings per SharePlan 1 Plan 2

Borrow $500,000 6% Issue $500,000 of stock

Net income before expansion $300,000 $300,000

Expected project income before interest & taxes $200,000 $200,000

Interest expense (30,000) 0

Income taxes (40%) (68,000) (80,000)

Expected project net income 102,000 120,000

Total net income 402,000 420,000

Common shares 100,000 150,000

Earnings per share $4.02 $2.80


49

The Leverage Ratio

Total assetsTotal assets

Total stockholders’ equityTotal stockholders’ equity


50

Times Interest Earned

Interest ExpenseInterest Expense

Operating IncomeOperating Income

High ratio = ease in paying

interest

High ratio = ease in paying

interest

Low ratio = difficulty in

paying interest

Low ratio = difficulty in

paying interest


51

Understand other long-term liabilities


52

OPERATING CAPITAL

• Lessee has right to use the asset

• Lessor retains risks and rewards of owing

• Lessee records Rent Expense

• Lessee has right to use the asset

• Lessee assumes risks and rewards of ownership

• Lessee capitalizes the leased asset and records a long-term liability

Leases


53

Capital Lease Criteria


54

Pensions and Postretirement Liabilities•Expense recorded while employees work

for the company•Cash contributed into pension plan assets•Obligations grows for future payments to

employees

UnderfundedPlan assets less than obligation

OverfundedPlan assets

greater than obligation


55

Report liabilities


56

Partial Balance SheetDecember 31, 2011

Note 10: Financial Instruments

Long-term debt

Liabilities Revolving credit $400

Current liabilities: 9% notes due 2015 350

Accounts payable $650 8% notes due 2018 750

Accrued liabilities 985 U.K. credit arrangement

600

Unearned revenue 877 7.5$ notes due 2017 585

Current portion of long-term debt

225 Total long-term debt 2,685

Total current liabilities 2,737 Less: current maturities

(225)

Long-term debt 2,460 Long-term debt $2,460

Other long-term liabilities 1.987


57


58

liabilities

Business

prentice hall

pearson education

sales tax payable

payable income taxes

principal payable

wages payable

accounts payable amounts

payable andinterest