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REPORTING AND ANALYZING LIABILITIES. 10. Financial Accounting, Sixth Edition. 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. - PowerPoint PPT Presentation
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10-1
REPORTING AND ANALYZING LIABILITIES
Financial Accounting, Sixth Edition
10
10-2
1. Explain a current liability and identify the major types of current
liabilities.
2. Describe the accounting for notes payable.
3. Explain the accounting for other current liabilities.
4. Identify the types of bonds.
5. Prepare the entries for the issuance of bonds and interest
expense.
6. Describe the entries when bonds are redeemed.
7. Identify the requirements for the financial statement presentation
and analysis of liabilities.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
10-3
Two key features:
1. Company expects to pay the debt from existing current
assets or through the creation of other current
liabilities.
2. Company will pay the debt within one year or the
operating cycle, whichever is longer.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
SO 1 Explain a current liability and identify the SO 1 Explain a current liability and identify the major types of current liabilities.major types of current liabilities.
Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable.
What is a Current Liability?
10-4 SO 2 Describe the accounting for notes payable.SO 2 Describe the accounting for notes payable.
Notes Payable
Written promissory note.
Require the borrower to pay interest.
Those due within one year of the balance sheet date
are usually classified as current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
10-5
Illustration: First National Bank agrees to lend $100,000 on
September 1, 2012, if Cole Williams Co. signs a $100,000,
12%, four-month note maturing on January 1. When a
company issues an interest-bearing note, the amount of
assets it receives generally equals the note’s face value.
Notes payable
100,000
Cash 100,000
SO 2 Describe the accounting for notes payable.SO 2 Describe the accounting for notes payable.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Sept. 1
10-6
Illustration: If Cole Williams Co. prepares financial statements
annually, it makes an adjusting entry at December 31 to
recognize interest.
Interest payable
4,000
Interest expense 4,000 *
SO 2 Describe the accounting for notes payable.SO 2 Describe the accounting for notes payable.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Dec. 31
* $100,000 x 12% x 4/12 = 4,000
10-7
Illustration: At maturity (January 1), Cole Williams Co. must
pay the face value of the note plus interest. It records payment
as follows.
Interest payable 4,000
Notes payable 100,000
SO 2 Describe the accounting for notes payable.SO 2 Describe the accounting for notes payable.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Jan. 1
Cash
104,000
10-8 SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Sales Tax Payable
Sales taxes are expressed as a stated percentage
of the sales price.
Retailer collects tax from the customer.
Retailer remits the collections to the state’s
department of revenue.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
10-9
Illustration: The March 25 cash register readings for Cooley
Grocery show sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the journal entry is:
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Mar. 25
Sales revenue10,000
Cash 10,600
Sales tax payable
600
10-10
Illustration: Cooley Grocery rings up total receipts of $10,600.
Because the amount received from the sale is equal to the
sales price 100% plus 6% of sales, (sales tax rate of 6%), the
journal entry is:
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
Mar. 25
Sales revenue10,000
Cash 10,600
Sales tax payable
600
Sometimes companies do not ring up sales taxes separately on the cash register.
* $10,600 / 1.06 = 10,000
*
10-11 SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Unearned Revenue
Revenues that are received before the company delivers goods or provides services.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
1. Company debits Cash, and credits a current liability account (unearned revenue).
2. When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.
10-12
Illustration: Superior University sells 10,000 season football
tickets at $50 each for its five-game home schedule. The entry
for the sales of season tickets is:
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Unearned ticket revenue
500,000
Cash 500,000Aug. 6
Ticket revenue
100,000
Unearned ticket revenue 100,000Sept. 7
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
As each game is completed, Superior records the earning of
revenue.
10-13
Illustration: Wendy Construction issues a five-year, interest-bearing
$25,000 note on January 1, 2011. This note specifies that each January
1, starting January 1, 2012, Wendy should pay $5,000 of the note. When
the company prepares financial statements on December 31, 2011,
1. What amount should be reported as a current liability? _________
2. What amount should be reported as a long-term liability? _______
Current Maturities of Long-Term Debt
Portion of long-term debt that comes due in the
current year.
No adjusting entry required.
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
$5,000
$20,000
10-14
The term “payroll” pertains to both:
Salaries - managerial, administrative, and sales
personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and manual
laborers (rate per hour).
Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay.
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Payroll and Payroll Taxes Payable
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
10-15
Illustration: Assume Cargo Corporation records its payroll for
the week of March 7 as follows:
Salaries and wages expense 100,000
Federal tax payable21,864
FICA tax payable7,650
State tax payable 2,922
Salaries and wages payable 67,564
SO 3SO 3
Cash
67,564
Salaries and wages payable 67,564Mar. 7
Record the payment of this payroll on March 7.
Mar. 7
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
10-16
Payroll tax expense results from three taxes that
governmental agencies levy on employers.
These taxes are:
FICA tax
Federal unemployment tax
State unemployment tax
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
10-17
Illustration: Based on Cargo Corp.’s $100,000 payroll,
the company would record the employer’s expense and
liability for these payroll taxes as follows.
Payroll tax expense 13,850
State unemployment tax payable800
FICA tax payable7,650
Federal unemployment tax payable 5,400
SO 3 Explain the accounting for other current liabilities.SO 3 Explain the accounting for other current liabilities.
Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
10-18
Bonds are a form of interest-bearing notes payable
issued by corporations, universities, and governmental
agencies.
Sold in small denominations (usually $1,000 or multiples
of $1,000).
SO 4 Identify the types of bonds.SO 4 Identify the types of bonds.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
10-19
Types of Bonds
Secured
Unsecured
Convertible
Callable
SO 4 Identify the types of bonds.SO 4 Identify the types of bonds.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
10-20
Bond certificate
Issued to the investor.
Provides name of the company issuing bonds, face
value, maturity date, and contractual (stated)
interest rate.
Face value - principal due at the maturity.
Maturity date - date final payment is due.
Contractual (stated) interest rate – rate to determine
cash interest paid, generally semiannually.
SO 4 Identify the types of bonds.SO 4 Identify the types of bonds.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
Issuing Procedures
10-21
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
SO 4SO 4
Illustration 10-3
10-22
Determining the Market Value of Bonds
The process of finding the present value is referred to as discounting the future amounts.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
SO 4 Identify the types of bonds.SO 4 Identify the types of bonds.
Market value is a function of the three factors that determine
present value:
1. the dollar amounts to be received,
2. the length of time until the amounts are received, and
3. the market rate of interest.
10-23
Illustration: Assume that Acropolis Company on January 1,
2012, issues $100,000 of 9% bonds, due in five years, with
interest payable annually at year-end.
Bond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term LiabilitiesBond: Long-Term Liabilities
Illustration 10-5Computing the market price of bonds
Illustration 10-4 Time diagram depicting cashflows
SO 4 Identify the types of bonds.SO 4 Identify the types of bonds.
10-24
A corporation records bond transactions when it
issues or retires (buys back) bonds and
when bondholders convert bonds into common stock (if
they are convertible).
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
Bonds may be issued at
face value,
below face value (discount), or
above face value (premium).
Bond prices are quoted as a percentage of face value.
SO 5 Prepare the entries for the issuance of bonds and interest expense.
10-25
Illustration: Devor Corporation issues 100, five-year, 10%,
$1,000 bonds dated January 1, 2012, at 100 (100% of face
value). The entry to record the sale is:
Jan. 1 Cash 100,000
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
Bonds payable 100,000
Prepare the entry Devor would make to accrue interest on
December 31.
Dec. 31 Interest expense 10,000
Interest payable 10,000
10-26
Prepare the entry Devor would make to pay the interest on Jan.
1, 2013.
Jan. 1 Interest payable 10,000
Cash 10,000
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face ValueIssuing Bonds at Face Value
10-27
8%
10%
12%
Premium
Face Value
Discount
Assume Contractual Rate of 10%Assume Contractual Rate of 10%
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Bonds Sold AtMarket Interest
Accounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond IssuesAccounting for Bond Issues
10-28
Illustration: Assume that on January 1, 2012, Candlestick Inc.
sells $100,000, five-year, 10% bonds at 98 (98% of face value)
with interest payable on January 1. The entry to record the
issuance is:
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Jan. 1 Cash 98,000
Discount on bonds payable 2,000
Bonds payable 100,000
Illustration 10-8Computation of total cost of borrowing—bonds issued at discount
10-29
Statement PresentationStatement Presentation
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Issuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a DiscountIssuing Bonds at a Discount
Illustration 10-7Statement presentation of discount on bonds payable
10-30
Illustration: Assume that the Candlestick Inc. bonds previously
described sell at 102 rather than at 98. The entry to record the
sale is:
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Jan. 1 Cash 102,000
Bonds payable 100,000
Premium on bonds payable 2,000
Illustration 10-12Computation of total cost of borrowing—bonds issued at premium
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
10-31
Statement Presentation
SO 5 Prepare the entries for the issuance of bonds and interest expense.
Illustration 10-11Statement presentation of premium on bonds payable
Issuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a PremiumIssuing Bonds at a Premium
10-32
Redeeming Bonds at Maturity
SO 6 Describe the entries when bonds are redeemed.SO 6 Describe the entries when bonds are redeemed.
Candlestick records the redemption of its bonds at maturity as
follows:
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
Bonds payable 100,000
Cash 100,000
10-33
When a company retires bonds before maturity, it is
necessary to:
1. eliminate the carrying value of the bonds at the redemption
date;
2. record the cash paid; and
3. recognize the gain or loss on redemption.
The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
SO 6 Describe the entries when bonds are redeemed.SO 6 Describe the entries when bonds are redeemed.
Redeeming Bonds at Maturity
10-34
Cash 103,000
Loss on bond redemption 2,600
Illustration: Assume at the end of the fourth period, Candlestick
Inc., having sold its bonds at a premium, retires the bonds at 103
after paying the annual interest. Assume that the carrying value of
the bonds at the redemption date is $100,400 (principal $100,000
and premium $400). Candlestick records the redemption at the end
of the fourth interest period (January 1, 2016) as:
Accounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond RetirementsAccounting for Bond Retirements
Bonds payable 100,000
Premium on bonds payable 400
SO 6 Describe the entries when bonds are redeemed.SO 6 Describe the entries when bonds are redeemed.
10-35
Analysis
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Illustration 10-16
SO 7
10-36
Liquidity
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Liquidity ratios measure the short-term ability of a company to pay
its maturing obligations and to meet unexpected needs for cash.
SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.
Illustration 10-17
10-37
Solvency
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
Solvency ratios measure the ability of a company to survive over a
long period of time.SO 7
10-38
Off-Balance-Sheet Financing
Contingencies
Leasing
► Operating lease
► Capital lease
Financial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and PresentationFinancial Statement Analysis and Presentation
SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.