Вы находитесь на странице: 1из 72

Chapter 9

Liabilities

1
Current Liabilities: Known
Amount
Accounts Short-term Sales tax
payable notes payable payable

Accrued Payroll Unearned


liabilities liabilities revenues

Current portion
of long-term
debt
2
Accounts Payable
 Amounts owed to vendors (suppliers) for goods
or services purchased on account
 Journalize Asian Art, Inc. $350 purchase of office
supplies on account
 9/28/x8 Office Supplies $350
 A/P $350
 To record supplies purchased on account

 Businesses often maintain subsidiary A/P ledgers to track


amounts owed to individual vendors
 Task made easier by computers

3
Short-Term Notes Payable
 Promissory note signed by the company
payable within the year
 Company recognizes liability to repay
principal amount borrowed
 Plus accrued interest expense/payable

EXAMPLE:
The Valley Chamber Orchestra signs a
$10,000, 2-month note payable in
exchange for some remodeling done in its
leased office space.
4
Short-Term Notes Payable

 The 2-month note bears interest at 9%


annually, and is made on November 15, 20x8.

11/15/x8 Leasehold Improvements $10,000


Note Payable, Short-Term $10,000
To record note issued for leasehold
improvement

5
Short-Term Notes Payable
 At fiscal year-end, December 31, the Orchestra
must accrue interest payable on the note.
12/31/x8 Interest Expense $115
Interest Payable $115
To accrue 20x8 interest expense on
note
($10,000 x .09 x 46*/360)
* Nov. = 15 days Dec. = 31 days
6
Short-Term Notes Payable
 At maturity
Jan 15 Note Payable, Short-term 10,000
Interest Payable 115
Interest Expense 35
Cash 10,150

7
Note Payable- Interest Bearing
Notes – more example
October 1, 20X8
Four months after the above date, I agree to pay
Financial Statements at December 31
$10,000 to City National Bank with interest at the rate
of 9% per annum. Income Statement
Interest expense 225
Ed Ryon Company
Balance Sheet
Notes payable 10,000
Interest Payable 225
10,225
Oct. 1 Cash 10,000
Notes Payable 10,000
Recording cash received from note
Feb. 1 Notes Payable 10,000
Interest Expense 75
Interest Payable 225
Dec. 31 Interest Expense 225
Cash 10,300
Interest Payable 225
$10,000 X 9% X 1/12 = $75
$10,000 X 9% X 3/12 = $225
Recording the interest expense and payment of note
Recording three months interest expense and interest

8
Sales Tax Payable

 State and local taxes assessed on retail


sales
 Sales tax collected by company along with
sales revenue
 Sales tax periodically remitted to local/state
government agencies

9
Example
 Ray’s Seafood Shack sold $3,475 of food
and beverages (excluding tax) on a busy
summer Friday evening
 Florida state sales tax is 6%, and Monroe
County imposes a Tourist Development
tax of 0.5%
 What is the journal entry to recognize
Ray’s sales tax payable?

10
Sales Tax Payable

7/9/x8 Cash $3,701


Sales Revenue $3,475
State Sales Tax Payable 209
County Sales Tax Payable 17
To record sales revenue for July 9

 Retail POS systems easily capture sales


revenue and related tax data
11
Payroll Liabilities

 Significant expense for many companies


 Total wages, salary, commissions,
bonuses paid to company employees in
exchange for their services

12
Payroll Liabilities
Deductions from employee payroll
include:
 Income taxes
 Group insurance (health/life)
premiums
 Union dues (if any)
 Credit union savings or loan repayment
 Contribution to provident fund
 Staff activities (e.g. tennis, Karaoke...)
13
Payroll Liabilities

Salary Expense (Wage Expense, Commission Expense) 10,000


Cash (to tax office on behalf of employee) 2,000
Cash (to retirement fund) 140
Cash (to staff, take home pay) 7,860
To record salary expense

14
Unearned Revenues
 Cash received from customers prior to
earning revenue
 Prior to delivering goods or providing
services to customers
 When customer prepays for a product or
service, company has obligation to:
 (1) Provide the product/service in
the future
 (2) Refund the unearned revenue
to customer 15
Unearned Revenues
Type of Business Unearned Rev. Earned Rev.
Airline Unearned Passenger Rev. Passenger Rev.
Magazine publisher Unearned Subscription Rev. Subscription Rev.
Hotel Unearned Rental Revenue Rental Revenue
Insurance Co. Unearned Premium Rev. Premium Rev.

16
Unearned Revenues

Customers of the Des Moines Register can prepay a 52-week newspaper


subscription in advance. If the subscription costs $108, how does the
Register adjust its balance sheet for unearned revenues?
A customer prepays her 52-week newspaper subscription beginning

October 13, 20x8

10/13/x8 Cash $108


Unearned Subscription Rev. $108
To record prepaid 52-week subscription

17
Unearned Revenues
The Register’s fiscal year ends on December 27, 20x8.
What adjusting entry must be made?
12/27/x8 Unearned Subscript. Rev. $22.55
Subscription Revenue $22.55
To recognize revenue earned in 20x4*

*$108 / 52 weeks = $2.0769 / week


$2.0769 / 7 days = $.2967 / day
$.2967 x 76 days (October 13 through December 27)

18
Unearned Revenue
 The Dun & Bradstreet (D&B) Corporation provides credit
evaluation services to businesses that subscribe to the
D&B reports. The liability account is called Unearned
Subscription Revenue. Assume that D&B charges a
client $150 for a three-year subscription. D&B’s entries
would be:
20X8
Jan. 1 Cash 150
Unearned Subscription Revenue 150
To receive cash for a three-year subscription
20X8, 20X9, 2010
Dec. 31 Unearned Subscription Revenue 50
Subscription Revenue ($150/3) 50
To record revenue earned at the end of each year

19
December 31,
Balance Sheet Year 1 Year 2 Year 3
Current liabilities:
Unearned subscription revenue $50 $50 -0-
Long-term liabilities:
Unearned subscription revenue $50 -0- -0-

Income Statement
Revenues:
Subscription revenue $50 $50 $50

20
Current Portion of Long-Term
Debt
 Long-term debt often paid in
installments
 Amount of principal payable within one
year
 Company reclassifies amount from long-
term to current

21
Estimated Current Liabilities

Provision for
Contingent
Warranty
Liabilities
Repairs

22
Provision for Warranty
Repairs
 Warranty expense is estimated in the year
product is sold
 Matching principle
JOURNAL
Date Accounts and explanation Debit Credit
Warranty expense
Provision for Warranty Repairs
To accrue warranty expense
Provision for Warranty Repairs
Inventory
To replace defective products sold under warranty
23
Contingent Liabilities
 Possible obligation that depends on future
outcome of past events, or
 Present obligation that may, but probably
will not, require outflow of resources, or
 Sufficiently reliable estimate of the
amount of a present obligation cannot be
made

24
Long-Term Liabilities

Bonds Notes
payable payable
Bonds Payable
 Debts of issuing company
 Bond certificate states:
 Company name
 Principal
 Maturity date
 Interest rate
 Interest payment dates
Types of Bonds

Term Secured

Serial Unsecured
Bond Prices
 Quoted as percent of maturity value
Premium Discount
Price above face Price below face
bond interest rate > bond interest rate <
market interest rate market interest rate
Credit balance Debit balance
Market price decreases Market price increases
towards maturity value towards maturity value
At
maturity Face Market
date value value
Bond Discount Example
Issue Date January 1, 2010
Face value $100,000
Stated interest rate 9%
Interest payments Semi-annual
Maturity date January 1, 2015
Market interest rate 10%
Issue price $96,139
Interest paid – 4.5% $4,500
semiannually
Time Value of Money
 Dollar received today is worth more than
one received in the future
 Dollar invested earns income
 Amount invested now to receive more later
 Present Value
 Present value depends on:
 Amount of future payment
 Length of time
 Interest rate
Interest Rates & Bond Prices
 Bonds always sold at market price
 Bond’s present value
 Two interest rates set bond price
 Stated interest rate (coupon rate)
 Printed on bond certificate
 Determines cash interest paid to bondholders
 Market interest rate (effective interest rate)
 Demanded by investors for loaning money
 Can fluctuate after bond issuance
Stated rate usually differs from market rate
Issue Price of Bonds Payable
Case A
Stated = Market Therefore, Issued at
interest rate interest rate Par
Case B
Stated < Market Therefore, Issued at
interest rate interest rate Discount
Case C
Stated > Market Therefore, Issued at
interest rate interest rate Premium
Issuing Bonds Payable at
Par

JOURNAL
Date Accounts and explanation Debit Credit
Jan 1 Cash 50,000
Bonds payable 50,000
To issue bonds at par

Jul 1 Interest expense 2,250


Cash 2.250
To pay semi-annual interest

33
Issuing Bonds Payable at Par
JOURNAL
Date Accounts and explanation Debit Credit
Bonds payable 50,000
Cash 50,000
To pay bonds at maturity
Issuing Bonds Payable at a
Discount

JOURNAL
Date Accounts and explanation Debit Credit
Cash 96,139
Discount on bonds payable 3,861
Bonds payable 100,000
To issue bonds at a discount
Balance Sheet Presentation
(at issuance, Discount)

Balance Sheet
Long-term liabilities:
Bonds payable $100,000
Less: Discount on bonds payable (3,861) $96,139
Interest Payment vs. Interest
Expense

Interest Stated
Face
payment value
interest 1/2
rate

Interest Market
Carrying
expense amount
interest 1/2
rate
Bond Discount Example

Issue Date January 1, 2010


Face value $100,000
Stated interest rate 9%
Interest payments Semi-annual
Maturity date January 1, 2015
Market interest rate 10%
Issue price $96,139
Interest paid – 4.5% $4,500
semiannually
A B C D D
Bond
Interest Interest Discount Discount
Date carrying
payment expense amortization balance
amount
1-10 $3,861 $96,139
7-10 $4,500 $4,807 $307 3,554 96,446
1-11 $4,500 4,822 322 3,232 96,768

1-15 $4.500 4,976 476 0 100,000


4600
4400
4200
I 4000
3800
n
3600
t
3400
e 3200
r 3000
e 2800
s 2600
t 2400
2200
Discount
E 2000 Amortization
x 1800
1600
p
1400
e
1200
n
s
1000 Interest Payment
800
e 600
400
200
0
Semiannual Interest Payment
1 2 3 4 5 6 7 8 9 10

40
1.2

Face value
B 1
o
n
d

0.8
C
a
r
r
y 0.6
i
n
g
0.4
A
m
o
u
n 0.2
t

0
1 2 3 4 5 6 7 8 9 10 11
Semiannual Interest Payments
41
JOURNAL
Date Accounts and explanation Debit Credit
2010
Jul 1 Interest expense 4,807
Discount on bonds payable 307
Cash 4,500
To pays semiannual interest and amortize bond discount

Dec. 31 Interest expense 4,822


Discount on bonds payable 322
Interest payable 4,500
To accrue semiannual interest and amortise bond discount.

42
Balance Sheet Presentation
(1st period)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Less: Discount on bonds payable (3,554) $96,446
Balance Sheet Presentation
(2nd period)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Less: Discount on bonds payable
Bond Premium Example

Issue Date January 1, 2010


Face value $100,000
Stated interest rate 9%
Interest payments Semi-annual
Maturity date January 1, 2015
Market interest rate 8%
Issue price $104,055
A B C D D
Bond
Interest Interest Premium Premium
Date carrying
payment expense amortization balance
amount
1-10 $4,055 $104,055
7-10 $4,500 $4,162 $338 3,718 103,718
1-11 $4,500 4,149 351 3,366 103,366

1-15 $4,500 4,019 481 0 100,000


4,600

Interest Payment
I
n
t
e
4,400
r
e
s Premium Amortization
t

E
x
p 4,200
e
n
s
e

4,000
1 2 3 4 5 6 7 8 9 10
Semiannual Interest Payment
B 105,000
o
n
d
104,000
C
a
r
r
y 103,000
i
n
g

A 102,000
m
o
u
n
t 101,000

100,000
Face value

99,000
1 2 3 4 5 6 7 8 9 10 11
Semiannual Interest Payments
Balance Sheet Presentation
(1st period)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Add: Premium on bonds payable 3,718 $103,718
Balance Sheet Presentation
(2nd period)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Add: Premium on bonds payable
Straight-Line Method
Discount or premium
Amortization
Number of interest payments

Interest Interest Amortization


OR
expense payment
Balance Sheet Presentation
(at issuance, Discount, SL)

Balance Sheet
Long-term liabilities:
Bonds payable $100,000
Less: Discount on bonds payable (3,861) $96,139
Balance Sheet Presentation
(at issuance, Premium, SL)

Balance Sheet
Long-term liabilities:
Bonds payable $100,000
Add: Premium on bonds payable 4,055 $104,055
Balance Sheet Presentation
(1st period, Discount, SL)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Less: Discount on bonds payable
Balance Sheet Presentation
(2nd period, Discount, SL)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Less: Discount on bonds payable
Balance Sheet Presentation
(1st period, Premium, SL)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Add: Premium on bonds payable
Balance Sheet Presentation
(2nd period, Premium, SL)
Balance Sheet
December 31, 2010
Long-term liabilities:
Bonds payable $100,000
Add: Premium on bonds payable
Retiring Bonds Before Maturity
 Reasons to pay off bonds early
 Can relieve high interest payments
 Can borrow at a lower interest rate
 Callable feature (Callable Bond)
 Issuer can pay off bonds at a prearranged
price
 Results in a gain or loss
Convertible Bonds
 Bondholders can exchange bonds for
share
 Investors benefit from:
 Guaranteed receipt of principal and interest
on bonds
 Potential for gains on shares
Account for capital and operating leases

60
Leases
OPERATING CAPITAL
 Lessee has right to use  Lessee has rights to use
the asset asset
 Lessor retains risks and  Lessee assumes risks
rewards of owing and rewards of ownership
 Lessee records Rent and associated
Expense obligations
 Present value of lease
payment capitalized
Capital Lease Criteria
Transfer of title Bargain purchase
at end of lease option

Present value of
Lease term > lease payments
75% of useful life >90% of fair
value of asset
Accounting for Capital Leases
 Lessee will record the present value of
lease payments on its books
 Depreciated in accordance to the entity’s
usual depreciation policy
 Lease payments made will be set off
against lease interest expense, and
remaining balance used to reduce the
outstanding lease payment
63
Journal Entries for Capital
Leases
• On signing the lease on July 1 20X1
20X1
July 1 Lease Asset 43, 295
Lease Liability 43,295
To record capital lease ($10,000 per year
for 5 years @5%).

• On making 1st lease payment on June 30 20X2


20X2
June 30 Lease Liability 7,835
Interest Expense 2,165
Cash 10,000
To record first capital lease payment.
64
Lease Amortization Schedule
Period Begin LL Payment Interest Principal End LL

1 $ 43,295 $10,000 $ 2,165 $ 7,835 $35,460

2 $35,460 $10,000 $ 1,773 $ 8,227 $ 27, 232

3 $27,232 $10,000 $ 1,362 $ 8,638 $ 18,594

4 $18,594 $10,000 $ 930 $ 9,070 $ 9,524

5 $9,524 $10,000 $ 476 $ 9,524 $ -0-


Understand the advantages and disadvantages
of borrowing

66
Financing Operations

Issuing Retained
shares earnings

Issuing
bonds
67
Earnings per Share
Plan 1 Plan 2
Borrow $500,000 6% Issue $500,000 of shares
Net income before
expansion $300,000 $300,000
Expected project income
before interest & taxes $200,000 $200,000
Interest expense (30,000) 0
Income taxes (40%) (68,000) (80,000)
Expected project net income 102,000 120,000
Total net income 402,000 420,000
Common shares 100,000 150,000
Earnings per share $4.02 $2.80
Times Interest Earned

Operating Income

Interest Expense

High ratio = Low ratio =


ease in paying difficulty in
interest paying interest
Pensions and Postretirement
Liabilities
 Expense recorded while employees
work for the company
 Cash contributed into pension plan
assets
 Obligations grows for future payments
to employees
Underfunded Overfunded
Plan assets less Plan assets greater
than obligation than obligation
Report liabilities on the balance sheet
Partial Balance Sheet Note 10: Financial Instruments
December 31, 2011 Long-term debt
Liabilities Revolving credit $400
Current liabilities: 9% notes due 2015 350
Accounts payable $650 8% notes due 2018 750
Accrued liabilities 985 U.K. credit arrangement 600
Unearned revenue 877 7.5$ notes due 2017 585
Current portion of long-term debt 225 Total long-term debt 2,685
Total current liabilities 2,737 Less: current maturities (225)
Long-term debt 2,460 Long-term debt $2,460
Other long-term liabilities 1.987

Вам также может понравиться