principles of financial accounting chapter 10. liabilities definition the debts and obligations of a...
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PRINCIPLES OF FINANCIAL ACCOUNTING
Chapter 10
Liabilities Definition
The debts and obligations of a business. Liabilities represent claims of creditors on the assets of a business.
Current liability: Debts expected to be paid within one year
or the operating cycle, whichever is longer. Debts to be paid from existing current
assets or through the creation of other current liabilities.
Types of current liabilities Notes Payable
Refer to example on page 453 Sales Tax Payable
Refer to example on page 454 Payroll and payroll taxes payable
Refer to example on page 355 Unearned revenues
Refer to the example on page 456 Current maturities of long-term debt
Analysis – Liquidity ratios Working capital – Current assets
less current liabilities Current ratio – Current assets
divided by current liabilities Acid test – Cash + Short term
Investments + Net receivables divided by current liabilities
Long-term debt Types of bonds:
Secured bonds Mortgage bonds Sinking fund
Unsecured bonds – debenture bonds Term or serial bonds – several
maturity dates Convertible and Callable Bonds
Bond terms Bond indenture – the bond contract Face value – the principal at
maturity Contractual interest rate – interest
paid on the bond Bond certificates
Determining the market value of bonds Present value of the maturity value Plus the present value of the
interest payments At the rate the bondholder selects
as yield rate
Bond journal entries Sale of bonds at face value –
example on page 466 Sale of bonds at a discount –
example on page 468 Sale of bonds at a premium –
example on page 470
Analysis Debt to total assets ratio:
Total liabilities / total assets Times interest earned ration:
Net income + interest expense + income tax / Interest expense
Contingent Liabilities Accrue (record journal entry) if the
loss is probable to happen and can be reasonably estimated.
Report only (footnote) if it does meet the above criteria unless the loss is remote then no disclosure is needed.
Lease Liabilities Operating lease – generally
temporary Report lease payments as Rent expense
Capital leases – Fair market value of the asset and the related liability for lease payments are recorded on the balance sheet. – Most companies try to avoid this.
Assignment E10-1 E10-4 E10-5 E10-6 E10-8 BYP10-2 BYP10-10 part a only