Presentation on theme: "REPORTING AND ANALYZING LIABILITIES"— Presentation transcript:
1 REPORTING AND ANALYZING LIABILITIES Chapter 10REPORTING AND ANALYZING LIABILITIES
2 Current Liabilities111Current liabilities are debts which can reasonably be expected to be paidFrom existing current assets or through the creation of other current liabilities, andWithin 1 year or the operating cycle, whichever is longerDebts that do not meet both criteria are Long-Term Liabilities
3 Types of Current Liabilities Notes PayableAccounts PayableUnearned RevenuesAccrued LiabilitiesTaxesSalaries and WagesInterest
4 Notes Payable Notes payable are 2 112Notes PayableNotes payable areObligations in the form of written notesOften used instead of accounts payable; they give written documentation if needed for legal remediesUsed for short-term and long-term financing needsMost often interest-bearing, requiring the borrower to pay interest
6 Review QuestionOn July 1, 2010, Madeline, Inc. borrowed $70,000 from Gramy Bank via a 6-month, 9% note payable. On January 1, 2011, what amount of cash will Madeline, Inc. pay the bank?$70,000.$66,850.$76,300.$73,150.
7 Review QuestionOn July 1, 2010, Madeline, Inc. borrowed $70,000 from Gramy Bank via a 6-month, 9% note payable. On January 1, 2011, what amount of cash will Madeline, Inc. pay the bank?$70,000.$66,850.$76,300.$73,150.
8 JournalOn 9/1/07 First National Bank lends $100,000 to Cole Williams Co. on a four-month, 12% note maturing 1/1/08.
9 JournalOn 9/1/07 First National Bank lends $100,000 to Cole Williams Co. on a four-month, 12% note maturing 1/1/08.Sept 1 Cash 100,000Notes Payable 100,000To record issuance of 12%, 4-month note to bankDec 31 Interest Expense ,000Interest Payable 4,000To accrue interest for 4 months on note.
10 Journal Jan 1 Notes Payable 100,000 Interest Payable 4,000 Cash ,000To record payment of 1st National Bank interest-bearing note and accrued interest at maturity.
11 Review Question $1,000 interest expense. $11,000 note payable. Windy Co. borrowed $10,000 cash on July 1, 2007, from Main Bank by signing a one-year, 10% note payable. Windy Co.’s financial statements at December 31, 2007, should reflect?$1,000 interest expense.$11,000 note payable.$500 interest payable.$1,000 interest revenue.
12 Review QuestionWindy Co. borrowed $10,000 cash on July 1, 2007, from Main Bank by signing a one-year, 10% note payable. Windy Co.’s financial statements at December 31, 2007, should reflect?$1,000 interest expense.$11,000 note payable.$500 interest payable.$1,000 interest revenue.
13 Computing InterestCompound Interest--Interest computed on principal plus previously accumulated interest.
14 Compounding Periods The period of time for which interest is computed. Interest is compounded annually or semi-annually.The interest rate per compounding period is the yearly interest rate divided by compounding periods per year.
15 Effects of Compound Interest Comparingthe valueof $100 lump suminvested at 10%for 20 years withsimple interestand compoundinterest.
16 Sales Taxes Payable Are collected from customers 11Sales Taxes PayableAre collected from customersAre expressed as a % of sales priceAre required by state law.Remitted to the state monthlyUsually rung separately from sales on the cash register.
17 Journal Mar 25 Cash 10,600 Sales 10,000 Sales Taxes Payable 600 To record daily sales and sales taxes.
19 Prepare the journal entry Payroll TaxesVarious payroll taxes are required by law to be withheld from employees’ gross paySocial Security (FICA) taxes withheld, employer and employee make equal contributions ($7,250)Federal income taxes ($21,864)State income taxes ($2,922)Net pay ($67,964)Prepare the journal entry
20 Journal Record payment of payroll Mar 7 Salaries and Wages Expense 100,000FICA Taxes Payable (employee’s share) 7,250Federal Income Taxes Payable ,864States Income Taxes Payable ,922Salaries and Wages Payable ,964Record payroll earned by employeesMar 7 Salaries and Wages Payable , Cash ,964Record payment of payroll
21 Review QuestionAmounts withheld from employee paychecks for FICA taxes and federal income taxes withheld should be reported by the employer as?Prepaid expenses Current liabilities Unearned RevenuesYes Yes NoNo Yes NoNo No YesYes No No
22 Review QuestionAmounts withheld from employee paychecks for FICA taxes and federal income taxes withheld should be reported by the employer as?Prepaid expenses Current liabilities Unearned RevenuesYes Yes NoNo Yes NoNo No YesYes No No
23 Journal Employers incur a second type of payroll-related activity. 1) Employer’s share of FICA2) Federal unemployment3) State unemploymentMar 7 Payroll Tax Expense ,450FICA Taxes Payable (employer’s share) 7,250 Federal Unemployment Taxes Payable State Unemployment Taxes Payable 5,400Record Employer payroll taxes
24 Unearned RevenueUnearned revenue is cash received before service or product is delivered (that is, before revenue is earned)Recorded as a liability until it is earned
25 Unearned Revenues Examples of unearned revenues Magazine subscriptions Rent received in advanceCustomer deposits for future serviceSale of airline tickets for future travelSale of season tickets to sporting events
26 Journal As each game is completed Aug 6 Cash 500,000 Unearned Ticket Revenue ,000Record sale of 10,000 tickets at $50 ea.As each game is completedSept 7 Unearned Ticket Revenue ,000Ticket Revenue ,000To record ticket revenue earned
27 Current Maturities of Long-Term Debt The portion of long-term debt due within the current year or operating cycleClassified as a current liabilityNo adjusting entry is necessary
28 Bonds11BondsA form of long-term, interest-bearing note payable issued by corporations, universities and governmental agenciesSold in small denominations, (usually multiples of $1,000) which makes them attractive to investorsAre in the form of a legal document that indicates the name of the issuer, the face value of the bonds, the contractual interest rate, and the maturity date
31 Bond Features Bonds have many different features Secured bonds have specific assets pledged as collateral, unsecured do notConvertible bonds may be converted into common stock at the bondholder’s optionCallable bonds are subject to retirement at a stated dollar amount prior to maturity
32 Accounting for Bond Issues 11Bonds may be issued atFace value whenstated rate = market rateBelow face value (discount) whenstated rate < market rate must discount price to get investors to buyAbove face value (premium) whenstated rate > market rate all investors want to own so the price is bid up
34 Selling Bonds at Discount On January 1, 2009, Candlestick, Inc., sells $100,000, 5-year, 10% bonds at 98 with interest payable on January 1.Jan 1 Cash 98,000Discount on Bonds Payable ,000* Bonds Payable ,000Record sale of bonds at a discount*The discount account is a contra account to the bond payable, not an asset account.
35 Statement Presentation of Discounted Bonds Long-term liabilitiesBonds payable $ 100,000Less: Discount on bonds payable ,000 $98,000Carrying Value
36 Selling Bonds at Premium On January 1, 2009, Candlestick, Inc., sells $100,000, 5-year, 10% bonds at 102 with interest payable on January 1.Jan 1 Cash 102, Bonds Payable ,000Premium Bonds Payable ,000*Sale of bonds at a premium*Premium is added to bonds payable on the balance sheet
37 Candlestick’s Statement Presentation of Premium Bonds Long-term liabilitiesBonds payable $ 100,000Add : Premium on bonds payable ,000 $102,000Carrying Value
38 Bond Premium/Discount Amortization Methods Straight-Line Method--A method of systematically writing off a bond premium or discount, resulting in equal amounts being amortized each period.
39 Bond Premium/Discount Amortization Methods Straight-Line MethodEffective-Interest Method--A method of systematically writing off a bond premium or discount, taking into consideration the time value of money.
40 Bond Premium/Discount Amortization Methods Straight-Line MethodEffective-Interest MethodThe effective-interest method is the preferred method for GAAP.
41 Bond Premium/Discount Amortization Methods For simplicity, we will assume discounts and premiums are amortized using straight line.Candlestick, Inc. would amortize the $2,000 discount/premium as follows$2,000 ÷ 5 Interest Periods= $400 Annually
44 Review QuestionIf bonds sell at a premium, the market rate of interest must be?Equal to the stated interest rate.Greater than the stated interest rate.Less than the stated interest rate.Cannot be determined from the information given.
45 Review QuestionIf bonds sell at a premium, the market rate of interest must be?Equal to the stated interest rate.Greater than the stated interest rate.Less than the stated interest rate.Cannot be determined from the information given.
46 Review Question True or False If bonds sell at a premium, interest expense will be more than cash interest paid.
47 Review QuestionFalseIf bonds sell at a premium, interest expense will be more than cash interest paid.If bonds sell at a premium, amortization will decrease interest expense, making it less than cash interest paid.
48 Bond Retirements Bonds may be redeemed at maturity or before maturity 11Bonds may be redeemed at maturity or before maturity
49 Redeeming Bonds Before Maturity A company may decide to retire bonds before maturity toreduce interest costremove debt from its balance sheetA company should retire debt early only if it has sufficient cash resources
50 Redeeming Bonds Before Maturity When bonds are retired before maturity, it is necessary toEliminate the carrying value of the bonds at the redemption dateRecord the cash paidRecognize the gain or loss on redemptionThe carrying value of the bonds is the bond payable plus the premium or minus the discount
51 Financial Statement Presentation and Analysis 11Current liabilities are listed first under “Liabilities” on the balance sheetA common method is to list the current liabilities in order of magnitude, beginning with the largestLong-term liabilities are listed in a separate section of the balance sheet
52 ANALYSISLiquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.Current Ratio = current assets/current liabilitiesSolvency ratios measure the ability of a company to survive over a long period of time.Debt to Total Assets Ratio = total liabilities/total assetsTimes Interest Earned Ratio = net income + interest expense + tax expense/interest expense
53 ANALYSISOff-balance sheet financing concerns whether a company has properly recorded all of its obligationsCommon types of off-balance sheet financing includeContingencies are events with uncertain outcomes (lawsuits, warranties, etc)Leases structured to avoid meeting the criteria of a capital lease, thus avoiding the recording of an asset and a liability
54 Review QuestionThe term used for bonds that have specific assets pledged as collateral is?Callable bonds.Convertible bonds.Secured bonds.Discount bonds.
55 Review QuestionThe term used for bonds that have specific assets pledged as collateral is?Callable bonds.Convertible bonds.Secured bonds.Discount bonds.
56 Other Long-Term Liabilities Deferred Income Taxes--An account to record the difference between income tax expense on the income statement and income taxes payable for the year to federal and state governments.Pension Liability--A contract between a company and its employees whereby the company agrees to pay benefits to employees after their retirement.