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Liabilities
1
Current Liabilities: Known
Amount
Accounts Short-term Sales tax
payable notes payable payable
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
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
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
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
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
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
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*
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
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
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
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
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
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%).
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