1、,Chapter10,Liabilities,TheNatureofLiabilities,I.O.U.,Definedasdebtsorobligationsarisingfrompasttransactionsorevents.,Maturity=1yearorless,Maturity1year,DistinctionBetweenDebtandEquity,Theacquisitionofassetsisfinancedfromtwosources:,Fundsfromcreditors,withadefiniteduedate,andsometimesbearinginterest.

2、,Fundsfromowners,DEBT,EQUITY,LiabilitiesQuestion,DevonMfg.borrows$100,000fromFirstBank.Theloanwillberepaidin20yearsandhasanannualinterestrateof8%.Isthisacurrentliabilityoranoncurrentliability?,LiabilitiesQuestion,Theobligationwillnotbepaidwithinoneyearoroneoperatingcycle,soitisanoncurrentliability.,

3、DevonMfg.borrows$100,000fromFirstBank.Theloanwillberepaidin20yearsandhasanannualinterestrateof8%.Isthisacurrentliabilityoranoncurrentliability?,EvaluatingLiquidity,CurrentRatio=CurrentAssets?CurrentLiabilities,WorkingCapital=CurrentAssets-CurrentLiabilities,Animportantindicatorofacompany抯abilitytome

4、etitscurrentobligations.Twocommonlyusedmeasures:,LiabilitiesQuestion,DevonMfg.hascurrentliabilitiesof$230,000andcurrentassetsof$322,000.WhatisDevonscurrentratio?,LiabilitiesQuestion,DevonMfg.hascurrentliabilitiesof$230,000andcurrentassetsof$322,000.WhatisDevonscurrentratio?,AccountsPayable,Short-ter

5、mobligationstosuppliersforpurchasesofmerchandiseandtoothersforgoodsandservices.,MerchandiseInventoryinvoices,Shippingcharges,Utilityandphonebills,Officesuppliesinvoices,NotesPayable,CurrentNotesPayable,NoncurrentNotesPayable,TotalNotesPayable,Whenacompanyborrowsmoney,anotepayableiscreated.CurrentPor

6、tionofNotesPayableTheportionofanotepayablethatisduewithinoneyear,oroneoperatingcycle,whicheverislonger.,NotesPayable,PROMISSORYNOTELocationDateafterthisdatepromisestopaytotheorderofthesumofwithinterestattherateofperannum.signedtitle,Miami,Fl,Nov.1,1999,Sixmonths,PorterCompany,JohnCaldwell,SecurityNa

7、tionalBank,$10,000.00,12.0%,treasurer,NotesPayable,OnNovember1,1999,PorterCompanywouldmakethefollowingentry.,Interestexpenseisthecompensationtothelenderforgivinguptheuseofmoneyforaperiodoftime.Theliabilityiscalledinterestpayable.Tothelender,interestisarevenue.Totheborrower,interestisanexpense.,Inter

8、estRateUp!,InterestPayable,Theinterestformulaincludesthreevariablesthatmustbeconsideredwhencomputinginterest:,Interest=Principal?InterestRate?Time,Whencomputinginterestforoneyear,time?equals1.Whenthecomputationperiodislessthanoneyear,thentime?isafraction.,InterestPayable,Forexample,ifweneededtocompu

9、teinterestfor3months,time?wouldbe3/12.,WhatentrywouldPorterCompanymakeonDecember31,thefiscalyear-end?,InterestPayableExample,InterestPayableExample,OnDecember31,PorterCompanywouldrecordinterestpayablewiththefollowingentry:,$10,00012%2/12=$200,PayrollLiabilities,Employersincurseveralexpensesandliabil

10、itiesfromhavingemployees.,FICATaxes,MedicareTaxes,FederalIncomeTax,StateandLocalIncomeTaxes,VoluntaryDeductions,NetPay,GrossPay,PayrollLiabilities,Deferredrevenueisrecorded.,Deferredrevenueisaliabilityaccount.,Cashisreceivedinadvance.,Cashissometimescollectedfromthecustomerbeforetherevenueisactually

11、earned.,UnearnedRevenue,Earnedrevenueisrecorded.,Astheearningsprocessiscompleted.,Deferredrevenueisrecorded.,Cashisreceivedinadvance.,UnearnedRevenue,Cashissometimescollectedfromthecustomerbeforetherevenueisactuallyearned.,Relativelysmalldebtneedscanbefilledfromsinglesources.,Banks,InsuranceCompanie

12、s,PensionPlans,or,or,Long-TermDebt,Largedebtneedsareoftenfilledbyissuingbonds.,Long-TermDebt,InstallmentNotesPayable,Long-termnotesthatcallforaseriesofinstallmentpayments.,EachpaymentcoversinterestfortheperiodANDaportionoftheprincipal.,Witheachpayment,theinterestportiongetssmallerandtheprincipalport

13、iongetslarger.,AllocatingInstallmentPaymentsBetweenInterestandPrincipal,Identifytheunpaidprincipalbalance.UnpaidPrincipal?Interestrate=Interestexpense.Installmentpayment-Interestexpense=Reductioninunpaidprincipalbalance.Computenewunpaidprincipalbalance.,AllocatingInstallmentPaymentsBetweenInterestan

14、dPrincipal,OnJanuary1,1999,RocketCorp.borrowed$7,851.57fromFirstBankofRiverCity.Theloanwasafive-yearloanandhadaninterestrateof10%.Theannualpaymentis$2,000.PrepareanamortizationtableforRocketCorp.sloan.,AllocatingInstallmentPaymentsBetweenInterestandPrincipal,Now,preparetheentryforthefirstpaymentonJa

15、nuary1,2000.,AllocatingInstallmentPaymentsBetweenInterestandPrincipal,Theinformationneededforthejournalentrycanbefoundontheamortizationtable.Thepaymentamount,theinterestexpense,andtheamounttocredittoprincipalareallonthetable.,BondsPayable,Bondsusuallyinvolvetheborrowingofalargesumofmoney,calledprinc

16、ipal.Theprincipalisusuallypaidbackasalumpsumattheendofthebondperiod.Individualbondsareoftendenominatedwithaparvalue,orfacevalue,of$1,000.,BondsPayable,Bondsusuallycarryastatedrateofinterest,alsocalledacontractrate.Interestisnormallypaidsemiannually.Interestiscomputedas:,Interest=Principal?StatedRate

17、?Time,BondsPayable,Bondsareissuedthroughanintermediarycalledanunderwriter.Bondscanbesoldonorganizedsecuritiesexchanges.Bondpricesareusuallyquotedasapercentageofthefaceamount.Forexample,a$1,000bondpricedat102wouldsellfor$1,020.,TypesofBonds,MortgageBonds,ConvertibleBonds,JunkBonds,DebentureBonds,Acco

18、untingforBondsPayable,OnJanuary1,2000,RocketCorp.issues$1,500,000of12%,10-yearbondspayable.Interestispayablesemiannually,eachJuly1andJanuary1.Assumethebondsareissuedatfacevalue.Recordtheissuanceofthebonds.,AccountingforBondsPayable,OnJanuary1,2000,RocketCorp.issues$1,500,000of12%,10-yearbondspayable

19、.Interestispayablesemiannually,eachJuly1andJanuary1.Assumethebondsareissuedatfacevalue.Recordtheissuanceofthebonds.,AccountingforBondsPayable,RecordtheinterestpaymentonJuly1,2000.,AccountingforBondsPayable,RecordtheinterestpaymentonJuly1,2000.,BondsSoldBetweenInterestDates,Bondsareoftensoldbetweenin

20、terestdates.Thesellingpriceofthebondiscomputedas:,Letslookatthepresentvalueconcept!Holdontight!,TheConceptofPresentValue,$1,000investedtodayat10%.,Moneycangrowovertime,becauseitcanearninterest.,$1,000investedtodayat10%.,In5yearsitwillbeworth$1,610.51.,In25yearsitwillbeworth$10,834.71!,PresentValue,F

21、utureValue,TheConceptofPresentValue,Howmuchisafutureamountworthtoday?,Today,PresentValue,FutureValue,Interestcompoundingperiods,TheConceptofPresentValue,Howmuchisafutureamountworthtoday?Threepiecesofinformationmustbeknowntosolveapresentvalueproblem:Thefutureamount.Theinterestrate(i).Thenumberofperio

22、ds(n)theamountwillbeinvested.,TheConceptofPresentValue,Twotypesofcashflowsareinvolvedwithbonds:,Today,Principalpaymentatmaturity.,Periodicinterestpaymentscalledannuities.,Maturity,TheConceptofPresentValue,ThePresentValueConceptandBondPrices,Thesellingpriceofthebondisdeterminedbythemarketbasedontheti

23、mevalueofmoney.,ThePresentValueConceptandBondPrices,Thesellingpriceofthebondisdeterminedbythemarketbasedonthetimevalueofmoney.,=,=,EarlyRetirementofDebt,Gainsorlossesincurredasaresultofretiringbondsshouldbereportedasextraordinaryitemsontheincomestatement.,LeasePaymentObligations,CapitalLeaseCriteria

24、,Pensions,Employersofferpensionplanstoemployees.,Retireesreceivepensionpaymentsfromthepensionfund.,Theemployermakespaymentstoapensionfund.Usually,thisisanindependententitymanagedbyaprofessionalfundmanager.,Pensions,Actuariesmakethepensionexpensecomputations,basedon:Avg.age,retirementage,lifeexpectan

25、cy.Employeeturnoverrates.Compensationlevels.Expectedrateofreturnforthefund.,Theaccountantthenpoststheentrytorecordpensionexpenseandpensionliability.,OtherPostretirementBenefits,Manycompaniesofferbenefitstoretireesotherthanpensions,suchashealthcoverageorfitnessclubmemberships.,Theunfundedliabilitymus

26、tbedisclosedontheemployer抯balancesheet.,DeferredIncomeTaxes,Corporationspayincometaxesquarterly.,Thedifferencebetweentaxexpenseandtaxpayableisrecordedinanaccountcalleddeferredtaxes.,TheInternalRevenueCodeisthesetofrulesforpreparingtaxreturns.,Financialstatementincometaxexpense.,IRSincometaxespayable.,GAAPisthesetofrulesforpreparingfinancialstatements.,Resultsin.,R