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Chapter 10 Reporting and Analyzing Liabilities - PowerPoint PPT Presentation

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Title: Chapter 10 Reporting and Analyzing Liabilities

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Prepare the entries for the issuance of bonds and their interest expense. Describe the entries when bonds are redeemed. ... Bonds... – PowerPoint PPT presentation

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Title: Chapter 10 Reporting and Analyzing Liabilities

1
(No Transcript)
2
Chapter 10 Reporting and Analyzing Liabilities

After studying Chapter 10 you should be able
to
Explain a current liability and identify the
major types of current liabilities.
Describe the accounting for notes payable.
Explain the accounting for other current
liabilities.
Identify the types of bonds.

3
Chapter 10 Reporting and Analyzing Liabilities

After studying Chapter 10 you should be able
to
Prepare the entries for the issuance of bonds and
their interest expense.
Describe the entries when bonds are redeemed.
Identify the requirements for the financial
statement presentation and analysis of
liabilities.

4
Liabilities are..

Creditors claims on total assets
Existing debts and obligations

Liabilities must be settled in the future by
transfer of assets or services.
5
Current Liabilities

Can reasonably be expected to be paid
From existing current assets or through the
creation of other current liabilities.
Within 1 year or the operating cycle whichever
is longer.

Debts that do not meet both criteria are
Long-Term Liabilities.
6
Types 0f Current Liability

Notes Payable
Accounts Payable
Unearned Revenues
Accrued Liabilities
Taxes
Salaries and Wages
Interest

7
Notes Payable are...

Obligations in the form of written
notes.
Often used instead of accounts payable - they
give written documentation if needed for legal
remedies.
Used for short-term and long-term financing
needs.

8
Journal
Sept 1 Cash 100000 Notes
Payable 100000 (To record issuance of 12
4-month note to bank)

Remember - Interest accrues over life of the note
and must be recorded periodically.

Dec 31 Interest Expense
4000 Interest Payable 4000 (To
accrue interest for 4 months on note)
100000 x .12 x 4\12 months
9
Journal
Jan 1 Notes Payable 100000
Interest Payable 4000
Cash
104000 (To record
payment of 1st National Bank interest-bearing
note and accrued interest at maturity)
10
Sales Taxes Payable...

Are collected from customers.
Are expressed as a of sales price.
Are required by law.
Must be sent to state often.
Are often rung separately from sales on the cash
register.

11
Journal
Mar 25 Cash 10600
Sales 10000 Sales Taxes Payable
600 (To record daily sales and
sales taxes)
12
Payroll Deductions
13
Payroll Taxes...

Amount required by law to be withheld from
employees gross pay.
Social Security taxes withheld (FICA- 7.65 for
2003)
Federal income taxes
State income taxes (if applicable)

14
Journal
Mar 7 Salaries and Wages Expense 100000 FICA
Taxes Payable 7650 Federal Income Taxes
Payable 21864 States Income Taxes
Payable 2922 Salaries and Wages Payable
67564 Mar 7 Salaries and Wages Payable
67564 Cash
67564
15
Journal
Employers incur a second type of payroll-related
activity. 1) Employers share of FICA 2) Federal
unemployment 3) State unemployment
Mar 7 Payroll Tax Expense 13850
FICA Taxes Payable 7250 Federal
Unemployment Taxes Payable
800 State Unemployment Taxes Payable
5400
16
Unearned Revenues...

Cash received before revenues are earned and
recorded as liabilities until they are earned.

17
Unearned Revenues...

Magazine subscriptions
Rent received in advance
Customer deposits
for future service
Sale of airline tickets
for future travel
Sale to season sporting
events

18
Journal
Aug 6 Cash
500000 Unearned Ticket Revenue
500000 (To record sale of 10000
tickets)
Sept 7 Unearned Ticket Revenue 100000
Ticket Revenue
100000 (To record
ticket revenue earned)
19
Current Maturities of Long-Term Debt

The portion of the long-term debt that is due
within the current year or operating cycle should
be classified as a current liability.

20
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21
Line of Credit...

Is a prearranged agreement between a company
and a lender to allow the company to borrow up to
an agreed-upon amount.

22
Long-Term Liabilities...

Are obligations that are expected to be paid
after 1 year.

23
Bonds...

Are a form of interest-bearing notes payable
issued by corporations universities and
governmental agencies.
Are sold in small denominations (usually
multiples of 1000) which makes
them attractive to
investors.

24
Bonds

A legal document that indicates
name of the issuer
face value of the bonds
contractual interest rate
maturity date
other data

25
Secured Bonds...

Have specific assets of the issuer pledged as
collateral for bonds.

26
Unsecured or Debenture Bonds...

Are issued against the general credit of the
borrower.

27
Convertible Bonds...

Can be changed into common stock at the
bondholders option.

Callable Bondssubject to retirement at a stated
dollar amount prior to maturity at the option of
the issuer.
28
Issuing Bonds...

Requires formal approval by Board of Directors
and/or stockholders.
Board of Directors must stipulate
Total number of bonds to be authorized
Total face value
Contractual
interest rate

29
Accounting for Bond Issues

Bonds may be issued at
Face value
Below face value (discount) or
Above face value (premium).

30
Bond Terms

Face Value - Amount of principal due at the
maturity date of the bond.
Discount - The difference between the face value
of a bond and its selling price when a bond is
sold for less than its face value.
Premium - The difference between the selling
price and the face value of a bond when a bond is
sold for more than its face value.

31
Bond Terms

Present Value - value today of an amount to be
received at some date in future after taking into
account current interest rates
Contractual Interest Rate - rate used to
determine the amount of interest the borrower
pays and the investor receives
Market Interest Rate - rate investors demand for
loaning money to the corporation

32
Cash Flow of Bonds
33
Issuing Bonds at Face Value

Devor Corporation issued 100 5-year 10
1000 bonds dated January 1 2004 at 100 (100
of face value) with interest payable annually
January 1.
Jan 1 Cash 100000 Bonds Payable
100000
(To record sale of bonds at face value)

34
Issuing Bonds at Face Value

The bonds are reported in the long-term
liability section of the balance sheet because
the maturity date is more than 1 year away.
The entry to record the annual interest on
December 31 is
Dec 31 Bond Interest Expense 10000
Bond Interest Payable 10000
(To accrue bond interest)

35
Discount or Premiums on Bonds

Often the contractual (stated) interest rate and
the market (effective) interest rate differ
therefore bonds sell above or below face value.

36
Bond Discount...

When the investor pays less than the face value
of the bond.
WHY
To adjust the contractual interest to the
market interest rate.

37
Selling Bonds at Discount

On January 1 2004 Candlestick Inc. sells
100000 5-year 10 bonds at 98 with interest
payable on January 1.
Jan 1 Cash 98000 Discount on Bonds
Payable 2000 Bonds Payable
100000
(To record sale of bonds at a discount)

38
Carrying (Book) Value of Bonds

Long-term liabilities
Bonds payable 100000
Less Discount on bonds 2000
98000 payable

39
Bond Premium...

When the investor pays more than the face value
of the bond.
WHY
To adjust the contractual interest to the
market interest rate.

40
Selling Bonds at Premium

On January 1 2004 Candlestick Inc. sells
100000 5-year 10 bonds at 102 with interest
payable on January 1.
Jan 1 Cash 102000 Bonds Payable
100000
Premium Bonds Payable
2000
(To record sale of bonds at a premium)

41
Carrying (Book) Value of Bonds