1、Liabilities,Chapter 10,The Nature of Liabilities,Defined as debts or obligations arising from past transactions or events.,Maturity = 1 year or less,Maturity 1 year,Distinction Between Debt and Equity,The acquisition of assets is financed from two sources:,Funds from creditors, with a definite due d

2、ate, and sometimes bearing interest.,Funds from owners.,Estimated Liabilities,Estimated liabilities have two basic characteristics: The liability is known to exist, The precise dollar amount cannot be determined until a later date.,Example: An automobile warranty obligation.,Short-term obligations t

3、o suppliers for purchases of merchandise and to others for goods and services.,Merchandise inventory invoices,Shipping charges,Utility and phone bills,Office supplies invoices,Current Liabilities: Accounts Payable,Examples,Total Notes Payable,When a company borrows money, a note payable is created.

4、Current Portion of Notes Payable The portion of a note payable that is due within one year, or one operating cycle, whichever is longer.,Current Liabilities: Notes Payable,Current Liabilities: Notes Payable,Accrued Liabilities,Accrued liabilities arise from the recognition of expenses for which paym

5、ent will be made in the future. Accrued liabilities are often referred to as accrued expenses.,Examples include: Interest payable, Income taxes payable, and Accrued payroll liabilities.,Payroll Liabilities,Gross Pay,Less Deductions:,a liability account.,Cash is sometimes collected from the customer

6、before the revenue is actually earned.,Unearned Revenue,As the earnings process is completed,Long-Term Liabilities,Large debt needs are often filled by issuing bonds.,Long-Term Liabilities,Maturing Obligations Intended to be Refinanced,One special type of long-term liability is an obligation that wi

7、ll mature in the current period but that is expected to be refinanced on a long-term basis.,If management has both the intend and ability to refinance soon-to-mature obligations on a long-term basis, these obligations are classified as long-term liabilities.,With each payment, the interest portion g

8、ets smaller and the principal portion gets larger.,Installment Notes Payable,Each payment covers interest for the period AND a portion of the principal.,Long-term notes that call for a series of installment payments.,Allocating Installment Payments Between Interest and Principal,Identify the unpaid

9、principal balance. Interest expense = Unpaid Principal Interest rate. Reduction in unpaid principal balance = Installment payment Interest expense. Compute new unpaid principal balance.,On January 1, Year 1, Kings Inn purchased furnishings at a cost of $7,581.57. The loan was a five-year loan and ha

10、d an interest rate of 10%. The annual payment is $2,000. Lets prepare an amortization table for Kings Inn.,Preparing an Amortization Table,Using the Amortization Table,The information needed for the journal entry can be found on the amortization table. The cash payment amount, the interest expense,

11、and the principal reduction amount are all in the table.,Using the Amortization Table,On January 1, Year 2, the first annual payment will be made on the installment note. Refer to the previous entry and amortization for the amounts shown.,Bonds Payable,Bonds usually involve the borrowing of a large

12、sum of money, called principal. The principal is usually paid back as a lump sum at the end of the bond period. Individual bonds are often denominated with a par value, or face value, of $1,000.,Bonds Payable,Bonds usually carry a stated rate of interest, also called a contract rate. Interest is nor

13、mally paid semiannually. Interest is computed as: Principal Stated Rate Time = Interest,Bonds Payable,Bonds are issued through an intermediary called an underwriter. Bonds can be sold on organized securities exchanges. Bond prices are usually quoted as a percentage of the face amount. For example, a

14、 $1,000 bond priced at 102 would sell for $1,020.,Mortgage Bonds,Convertible Bonds,Junk Bonds,Debenture Bonds,Types of Bonds,On March 1, 2011, Wells Corporation issues $1,500,000 of 12%, 10-year bonds payable. Interest is payable semiannually, each March 1 and September 1. Assume the bonds are issue

15、d at face value. Record the issuance of the bonds.,Accounting for Bonds Payable,Record the interest payment on September 1, 2011.,Accounting for Bonds Payable,Bonds Issued Between Interest Dates,Bonds are often sold between interest dates. The selling price of the bond is computed as:,Bonds Issued a

16、t a Discount or a Premium,The selling price of the bond is determined by the market based on the time value of money.,Bonds Issued at a Discount,Wells, Corp. issues bonds on January 1, 2011. Principal = $1,000,000 Issue price = $950,000 Stated Interest Rate = 9% Interest Dates = 6/30 and 12/31 Matur

17、ity Date = Dec. 31, 2030 (20 years),Bonds Issued at a Discount,To record the bond issue, Well, Inc. would make the following entry on January 1, 2011:,Maturity Value,Carrying Value,Bonds Issued at a Discount,Amortizing the discount over the term of the bond increases Interest Expense each interest p

18、ayment period.,Bonds Issued at a Discount,Using the straight-line method, the discount amortization will be $1,250 every six months. $50,000 40 periods = $1,250,Amortization of the Discount,We prepare the following journal entry to record the first interest payment.,Maturity Value,Carrying Value,$50

19、,000 $1,250 $1,250,The carrying value will increase to exactly $1,000,000 on the maturity date.,Bonds Issued at a Discount,Wells Corporation will repay the principal amount on December 31, 2030 with the following entry:,Bonds Issued at a Discount,The Concept of Present Value,How much is a future amount worth today?,Present Value,Future Value,Interest compounding periods,Today,Two types of cash flows are involved with bonds:,Today,Principal payment at maturity is a lump sum payment.,Periodic interest payments called annuities.,Maturity,The Concept of Present Value,Ea