Plain Background Power Point Slides Chapter 8 Current and Long Term Liabilities 3366

8/9/2019 Plain Background Power Point Slides Chapter 8 Current and Long Term Liabilities 3366

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

1

Current and Long-TermLiabilities

Chapter 8


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3

Current Liabilities

Obligations due within one yearor within companys normal

operating cycle if it is longerKnown amount

Estimated amount


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4

Known amountAccounts payable

Short-term notes payableSales tax payableCurrent portion of long-term debtAccrued expensesPayroll liabilitiesUnearned revenues

Current Liabilities


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Short-Term Notes Payable

On January 30, a business purchasedinventory for $8,000 by issuing a 1-

year, 10% note payable. The fiscalyear ends on April 30.

General Journal

Date Accounts and Explanations PR Debit Credit

Jan 30 Inventory 8,000

Notes Payable 8,000

Purchased inventory by issuinga one-year, 10% note



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eneral Journal

ate ccounts and xplanations ebit redit

pr 30 Interest xpense 200

Interest ayable 200To accrue interest at year-end

How much interest was accrued as of April 30?

$8,000 10% (3/12) = $200



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$8,000 10% (9/12) = $600

General Journal


Jan 30 Note Payable 8,000

Interest Payable 200

Interest Expense 600Cash 8,800

To record payment of loan



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Sales Tax Payable

One days sales at a Home DepotStore totaled $200,000. The business

collected an additional 5% in salestax. Record the days sales.

Gene al Jou nal

ate Accounts and xplanations ebit edit

ash ($200,000 X 1.05) 210,000

Sales evenue 200,000

Sales Tax ayable 10,000

To record cash sales and relatedsales tax



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12

Unearned Revenues

The Bradstreet Corporation providescredit evaluation services to

subscribers. Bradstreet charges aclient $750 for a three-yearsubscription. Prepare the entry.


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Unearned Revenues

ene al Jou nal

ate ccounts and xplanations ebit edit

Jan 1 ash 750

Unea ned evenue 750

To record receipt for a 3-yearsubscription

Dec 31 U earned Revenue 250

Subscription Revenue 250To record revenue earned atyear-end (750 x 12/36 months)



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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren14

Current Liabilities That

Must Be EstimatedBlack & Decker made sales of

$200,000 subject to product

warranties. They estimate that 3%of the products it sells this year willrequire repair or replacement.

What is the estimated warrantyexpense?


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Estimated Warranty Payable

$200,000 .03 = $6,000

General JournalDate Accounts and Explanations PR Debit Credit

Warranty Expense 6,000

Estimated Warranty Payable 6,000

To accrue warranty expense



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Bonds: An Introduction

Groups of long-term notespayable issued to multiple

lenders (bondholders)


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Types of Bonds

Term bonds

Serial bonds

Secured (mortgage) bonds

Unsecured (debenture) bonds


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Bond Prices

Quoted at a percent of theirmaturity value.

A $1,000 bond quoted at 101 sellsfor $1,000 1.015 = $1,015.

A $1,000 bond quoted at 88-3/8 sellsfor $1,000 0.88375 = $883.75.


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Bond Prices

Bond issued above face (par)value - premium

Bond issued at below face (par)value - discount

As a bond nears maturity, its

market price moves toward parvalue


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Bond Interest Rates

Bonds are sold at market price -amount that investors are willing topay at any given time

Market price represents:

present value of periodic interestpayments

present value of principal to bereceived at maturity


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Bond Interest Rates

Contract rate stated rate

Market rate effective rate


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Learning Objective 2

Account for bonds payabletransactions.


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Issuing Bonds at Par Value

On January 1, ChryslerCorporation issued $50,000 of

9%, 5-year bonds at par.

General Journal


Jan 1 Cash 50,000Bonds Payable 50,000

To issue 9%, 5-years bonds at par



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Issuing Bonds at Par Value

Record semiannual interestpayments.

General Journal


Jul 1 Interest Expense 2,250

Cash 2,250

To pay semiannual interest$50,000 9% 6/12 = $2,250



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Issuing Bonds at a Discount

Chrysler issues $100,000 of its 9%,five-year bonds when the market

interest rate is 10%. Chryslerreceives $96,149 at issuance.

Gene al Jou nal

ate Accounts and xplanations ebit edit

Jan 1 ash 96,149iscount on B nds ayable 3,851

B nds ayable 100,000

To issue 9%, 5-years bonds at adiscount.



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Issuing Bonds Payable

at a DiscountChryslers balance sheet immediatelyafter issuance of the bonds:

Total current liabilities $ XXXLong-term liabilities:Bonds payable, 9%, due 2009 $100,000Discount on bonds payable ( 3,851) 96,149

Discount on Bonds Payable - contra accountto Bonds Payable



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Measure interest expense.


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Amortization Table on Bonds

Issued at a DiscountInterest

Date

Interest

Payment

Interest

Expense

Discount

Amortiza-

tion

Discount

Account

Balance

Bond

Carrying

Amount

1/1/2004 3,851$ $96,149

7/1/2004 4,500$ 4,807$ 307$ 3,544 96,456

1/1/2005 4,500 4,823 323 3,221 96,779

7/1/2005 4,500 4,839 339 2,882 97,118

1/1/2009 4,500 4,961 461 -0- 100,000



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Interest Expense on Bonds

Issued at a DiscountOn July 1, 2004, Chrysler makes thefirst $4,500 semiannual interest

payment and also amortizes(decreases) the bond discountGeneral Journal


Jul

1

Interest Expense

4,807Discount on Bonds Payable 307

Cash 4,500

To pay semiannual interest &amortize bond discount



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Issued at a DiscountAt December 31, 2004, Chrysleraccrues interest and amortizes the

bond discount for July throughDecember.

General Journal


Dec

31 Interest Expense

4,823Discount on Bonds Payable 323

Interest Payable 4,500

To accrue semiannual interest &amortize bond discount



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Issued at a Discount

Bonds Payable Discount on Bonds Payable100,000 3,851 307 July 1

323 Dec. 31

3,221

Bond carrying amount: $100,000 $3,221 = $96,779

Chryslers bond accounts as of December 31, 2004.


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Chrysler Corporation issues $100,000 of9%, five-year bonds when the marketinterest rate is 8%. Chrysler receives$104,100 at issuance.

Issuing Bonds Payable

at a Premium

General Journal

ate Accounts and xplanations ebit redit

ash 104,100remium on B nds ayable 4,100

B nds ayable 100,000

To issue 9%, 5-years bonds at apremium.



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Amortization Table on Bonds

Issued at a DiscountInterest

te

Interest

y ent

Interest

ense

Premi m

mortiz -

tion

Premi m

ount

B l nce

Bond

rrying

mount

1/1/2004 4,100$ $104,100

7/1/2004 4,500$ 4,164$ 336$ 3,764 103,764

1/1/2005 4,500 4,151 349 3,415 103,415

7/1/2005 4,500 4,137 363 3,052 103,052

1/1/2009 4,500 3,955 545 -0- 100,000



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Issued at a DiscountOn July 1, 2004, Chrysler makes thefirst $4,500 semiannual interest

payment and also amortizes(decreases) the bond premiumGeneral Journal


Jul 1 Interest Expense 4,164

Premium on Bonds Payable 336

Cash 4,500

To pay semiannual interest &amortize bond premium



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Straight-Line Amortization

Amortizes discount or premiumby dividing it into equal amounts

for each interest periodChrysler would amortize the

$4,100 premium over 10periods.

$4,100 10=$410 per period


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Early Retirement of Bonds

PayableAir Products and Chemicals, Inc.,has $70,000 of debenture

bonds outstanding withunamortized discount of $350.The market price is 99.


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Early Retirement of Bonds

PayablePar value of bonds $70,000Less: Unamortized discount ( 350)Carrying amount of the bonds $69,650

Market price ($70,000 0.9925) 69,475Extraordinary gain on retirement $ 175

G r l r l

t t l ti it r it

B y l 70,000i t B y l 350

h 69,475

G i tir m t fB 175

To record bond retirement



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Convertible Bonds and Notes

Texas Instruments has convertible notespayable of $250,000. Assume thatnoteholders convert half the notes into4,000 shares, $1 par common stock.

G r l r l

t t l ti it r it

N t y l 125,000mm St k 4,000

i -i it l 121,000

To record conversion of notespayable



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Understand the advantages anddisadvantages of borrowing.


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Financing Operations

With Bonds or StocksIssuing Stock Issuing Notes or Bonds

No liabilitiesNo interest expense

Less risky tocorporation

Does not dilute stockownership or control

Results in higherearningsper share


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Long-Term Liabilities: Leases

Lease - rental agreement inwhich the tenant (lessee)

agrees to make rent paymentsto the property owner (lessor).

Operating

Capital


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Long-Term Liabilities: Leases

Capital lease:

transfers title at end of the term

contains bargain purchase option lease terms cover 75% or more of

estimated useful life of leased asset

present value of lease payments is90% or more of the market value ofleased asset


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Long-Term Liabilities: Pensions

Record pension and retirementbenefit expenses while employeeswork for the company

At end of each period, compare thefair market value of the assets inthe pension plan cash and

investments

with the plansaccumulated benefit obligation


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Long-Term Liabilities: Pensions

If accumulated benefitobligation exceeds plan assets,

the plan is underfundedReport excess liability amount

as a long-term pension liabilityon the balance sheet


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Report liabilities on the balancesheet.


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Reporting Liabilities

Accounts payable $1,976Accrued salaries and related expenses 627

Sales tax payable 298Other accrued expenses 1,402Income taxes payable 78Current installments of long-term debt 4

Total current liabilities $4,385Long-term debt 1,545Other long-term liabilities 451

Amounts in millions



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Reporting Fair Market Valueof Long-Term Debt

FASBStatement No. 107

requires companies to report

fair market value of theirfinancial instruments, whichincludes long-term debt.


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Reporting Financing Activitieson the Statement of Cash Flows

CashF ow fromFinancing Activities:

Borrowing by using commercial paper $754Proceeds from long-term borrowings 32Payment of long-term debt (29)Proceeds from issuance of common stock 351

Payments of cash dividends (371)Other, net (4)Net cash provided by financing activities $733

Amounts in millionsYear Ended

December 31



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End ofChapter8

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Plain Background Power Point Slides Chapter 8 Current and Long Term Liabilities 3366