1. PRINCIPLES OF FINANCIAL ACCOUNTING
Chapter 10

2. Liabilities Definition Current liability:
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.

3. 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

4. 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

5. 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

6. Bond terms Bond indenture – the bond contract
Face value – the principal at maturity
Contractual interest rate – interest paid on the bond
Bond certificates

7. 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

8. 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

9. Analysis Debt to total assets ratio: Times interest earned ration:
Total liabilities / total assets
Times interest earned ration:
Net income + interest expense + income tax / Interest expense

10. 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.

11. 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.

12. Assignment
E10-1
E10-4
E10-5
E10-6
E10-8
BYP10-2
BYP10-10 part a only