Fa 6 CH 08

Current and Long-Term Liabilities
Chapter 8
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 1
Account for current liabilities and contingent liabilities.
Current Liabilities
Obligations due within one year
or within companys normal operating cycle if it is longer Known amount Estimated amount
Current Liabilities
Known amount Accounts payable Short-term notes payable Sales tax payable Current portion of long-term debt Accrued expenses Payroll liabilities Unearned revenues
4
Short-Term Notes Payable

On January 30, a business purchased inventory for $8,000 by issuing a 1year, 10% note payable. The fiscal year ends on April 30.
General Journal Date Accounts and Explanations PR Debit Credit
Jan 30 Inventory Notes Payable Purchased inventory by issuing a one-year, 10% note
8,000 8,000

How much interest was accrued as of April 30? $8,000 10% (3/12) = $200
Date General Journal Accounts and Explanations PR Debit Credit
Apr 30 Interest Expense Interest Payable To accrue interest at year-end
200
200

Jan 30 Note Payable Interest Payable Interest Expense Cash To record payment of loan
$8,000 10% (9/12) = $600
8,000 200 600 8,800
Sales Tax Payable

One days sales at a Home Depot Store totaled $200,000. The business collected an additional 5% in sales tax. Record the days sales.
Cash ($200,000 X 1.05) Sales Revenue Sales Tax Payable To record cash sales and related sales tax
210,000 200,000 10,000
Current Installment of Long-Term Debt Amount of the principal that is payable within one year
Accrued Expenses
Expenses that have been
incurred but not recorded Salaries Taxes withheld Interest Utilities

10
Payroll Liabilities
Salary Expense Employee Income Tax Payable FICA Tax Payable Salary Payable To record salary expense
10,000
1,200 800 8,000
Unearned Revenues
The Bradstreet Corporation provides credit evaluation services to subscribers. Bradstreet charges a client $750 for a three-year subscription. Prepare the entry.
12
Unearned Revenues
Date General Journal Accounts and Explanations PR Debit Credit
Jan 1 Cash Unearned Revenue To record receipt for a 3-year subscription Dec 31 Unearned Revenue Subscription Revenue To record revenue earned at year-end (750 x 12/36 months)
750 750
250 250
Current Liabilities That Must Be Estimated

Black & Decker made sales of $200,000 subject to product warranties. They estimate that 3% of the products it sells this year will require repair or replacement. What is the estimated warranty expense?
14
Estimated Warranty Payable

$200,000 .03 = $6,000
Warranty Expense Estimated Warranty Payable To accrue warranty expense
6,000 6,000
Estimated Warranty Payable

Defective merchandise totals $5,800. Black & Decker will replace it and record the following:
Estimated Warranty Payable Inventory To replace defective products sold under warranty
5,800
5,800
Contingent Liabilities
Potential liability that depends on a
future event arising out of past events. Record liability if:

it is probable that the loss will occur and the amount can be reasonably estimated
17
Contingent Liabilities
Report in the notes to the
financial statement if it is reasonably possible that a loss or expense will occur. There is no reason to report contingent loss that is remote unlikely to occur.
18
Bonds: An Introduction
Groups of long-term notes
payable issued to multiple lenders (bondholders)
19
Types of Bonds
Term bonds Serial bonds Secured (mortgage) bonds Unsecured (debenture) bonds
20
Bond Prices
Quoted at a percent of their maturity value.
A $1,000 bond quoted at 101 sells for $1,000 1.015 = $1,015. A $1,000 bond quoted at 88-3/8 sells for $1,000 0.88375 = $883.75.
21
Bond Prices
Bond issued above face (par)
value - premium Bond issued at below face (par) value - discount As a bond nears maturity, its market price moves toward par value
22
Present Value
The amount invested today receives a greater amount at a future date present value of a future amount It depends on:
amount
of the future receipt length of time to future receipt interest rate for the period
23
Bond Interest Rates

Bonds are sold at market price -
amount that investors are willing to pay at any given time Market price represents:
present
value of periodic interest payments present value of principal to be received at maturity

24
Bond Interest Rates

Contract rate stated rate Market rate effective rate
25
Account for bonds payable transactions.
26
Issuing Bonds at Par Value

On January 1, Chrysler Corporation issued $50,000 of 9%, 5-year bonds at par.
Jan 1 Cash Bonds Payable To issue 9%, 5-years bonds at par
50,000 50,000
Issuing Bonds at Par Value

Record semiannual interest payments.
Jul 1
Interest Expense Cash To pay semiannual interest $50,000 9% 6/12 = $2,250
2,250 2,250
Issuing Bonds Payable at Par Value

Dec 31 Interest Expense Interest Payable To accrue interest $50,000 9% 6/12 = $2,250
2,250 2,250
Issuing Bonds at a Discount

Chrysler issues $100,000 of its 9%, five-year bonds when the market interest rate is 10%. Chrysler receives $96,149 at issuance.
Jan 1 Cash Discount on Bonds Payable Bonds Payable To issue 9%, 5-years bonds at a discount.
96,149 3,851 100,000
Issuing Bonds Payable at a Discount

Chryslers balance sheet immediately after issuance of the bonds:
Total current liabilities Long-term liabilities: Bonds payable, 9%, due 2009 Discount on bonds payable $ XXX
$100,000 ( 3,851) 96,149
Discount on Bonds Payable - contra account to Bonds Payable

Measure interest expense.
32
Amortization Table on Bonds Issued at a Discount

Interest Date Interest Payment Interest Expense Discount Discount Amortiza- Account tion Balance Bond Carrying Amount
1/1/2004 7/1/2004 1/1/2005 7/1/2005
$ 4,500 4,500 4,500
$ 4,807 4,823 4,839
307 323 339
$ 3,851 3,544 3,221 2,882
$96,149 96,456 96,779 97,118
1/1/2009
4,500
4,961
461
-0-
100,000
Interest Expense on Bonds Issued at a Discount

On July 1, 2004, Chrysler makes the first $4,500 semiannual interest payment and also amortizes (decreases) the bond discount
Jul 1
Interest Expense Discount on Bonds Payable Cash To pay semiannual interest & amortize bond discount
4,807 307 4,500

At December 31, 2004, Chrysler accrues interest and amortizes the bond discount for July through December.
Dec 31 Interest Expense Discount on Bonds Payable Interest Payable To accrue semiannual interest & amortize bond discount
4,823 323 4,500

Chryslers bond accounts as of December 31, 2004.
Bonds Payable Discount on Bonds Payable
100,000
3,851 307 July 1 323 Dec. 31 3,221
Bond carrying amount: $100,000 $3,221 = $96,779

36
Issuing Bonds Payable at a Premium

Chrysler Corporation issues $100,000 of 9%, five-year bonds when the market interest rate is 8%. Chrysler receives $104,100 at issuance.
Cash Premium on Bonds Payable Bonds Payable To issue 9%, 5-years bonds at a premium.
104,100 4,100 100,000
Issuing Bonds Payable at a Premium

Chryslers balance sheet immediately after issuance of the bonds:
Total current liabilities Long-term liabilities: Bonds payable $100,000 Premium on bonds payable 4,100 $ XXX
$104,100
Amortization Table on Bonds Issued at a Discount

Interest Date Interest Payment Interest Expense Premium Premium Amortiza- Account tion Balance Bond Carrying Amount
1/1/2004 7/1/2004 1/1/2005 7/1/2005
$ 4,500 4,500 4,500
$ 4,164 4,151 4,137
336 349 363
$ 4,100 3,764 3,415 3,052
$104,100 103,764 103,415 103,052
1/1/2009
4,500
3,955
545
-0-
100,000

On July 1, 2004, Chrysler makes the first $4,500 semiannual interest payment and also amortizes (decreases) the bond premium
Jul 1
Interest Expense Premium on Bonds Payable Cash To pay semiannual interest & amortize bond premium
4,164 336 4,500
Straight-Line Amortization
Amortizes discount or premium by dividing it into equal amounts for each interest period Chrysler would amortize the $4,100 premium over 10 periods.
$4,100 10 = $410 per period
41
Early Retirement of Bonds Payable Air Products and Chemicals, Inc., has $70,000 of debenture bonds outstanding with unamortized discount of $350. The market price is 99.
42
Early Retirement of Bonds Payable

Par value of bonds Less: Unamortized discount Carrying amount of the bonds Market price ($70,000 0.9925) Extraordinary gain on retirement
$70,000 ( 350) $69,650 69,475 $ 175

70,000
Bonds Payable Discount on Bonds Payable Cash Gain on Retirement of Bonds To record bond retirement
350 69,475 175
Convertible Bonds and Notes

Texas Instruments has convertible notes payable of $250,000. Assume that noteholders convert half the notes into 4,000 shares, $1 par common stock.
Notes Payable Common Stock Paid-in Capital To record conversion of notes payable
125,000
4,000 121,000
Understand the advantages and disadvantages of borrowing.
45
Financing Operations With Bonds or Stocks

Issuing Stock No liabilities No interest expense Issuing Notes or Bonds Does not dilute stock ownership or control Results in higher earningsper share
Less risky to corporation
46
Long-Term Liabilities: Leases

Lease - rental agreement in which the tenant (lessee) agrees to make rent payments to the property owner (lessor). Operating Capital
47
Long-Term Liabilities: Leases

Capital lease: transfers title at end of the term contains bargain purchase option lease terms cover 75% or more of estimated useful life of leased asset present value of lease payments is 90% or more of the market value of leased asset
48
Long-Term Liabilities: Pensions

Record pension and retirement
benefit expenses while employees work for the company At end of each period, compare the fair market value of the assets in the pension plan cash and investments with the plans accumulated benefit obligation
49
Long-Term Liabilities: Pensions

If accumulated benefit
obligation exceeds plan assets, the plan is underfunded Report excess liability amount as a long-term pension liability on the balance sheet
50
Report liabilities on the balance sheet.
51
Reporting Liabilities
Amounts in millions
Accounts payable Accrued salaries and related expenses Sales tax payable Other accrued expenses Income taxes payable Current installments of long-term debt Total current liabilities Long-term debt Other long-term liabilities
$1,976 627 298 1,402 78 4 $4,385 1,545 451
Reporting Fair Market Value of Long-Term Debt FASB Statement No. 107 requires companies to report fair market value of their financial instruments, which includes long-term debt.
53
Reporting Financing Activities on the Statement of Cash Flows

Amounts in millions
Year Ended December 31
Cash Flow from Financing Activities: Borrowing by using commercial paper Proceeds from long-term borrowings Payment of long-term debt Proceeds from issuance of common stock Payments of cash dividends Other, net Net cash provided by financing activities
$754 32 (29) 351 (371) (4) $733
End of Chapter 8
55

Fa 6 CH 08

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fa 6 CH 08

Uploaded by

Copyright:

Available Formats

Current and Long-Term Liabilities

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Short-Term Notes Payable

Short-Term Notes Payable

Apr 30 Interest Expense Interest Payable To accrue interest at year-end

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Short-Term Notes Payable

$8,000 10% (9/12) = $600

8,000 200 600 8,800

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Sales Tax Payable

210,000 200,000 10,000

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

incurred but not recorded Salaries Taxes withheld Interest Utilities

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Current Liabilities That Must Be Estimated

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Estimated Warranty Payable

Warranty Expense Estimated Warranty Payable To accrue warranty expense

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Estimated Warranty Payable

future event arising out of past events. Record liability if:

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

payable issued to multiple lenders (bondholders)

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Bond Interest Rates

value of periodic interest payments present value of principal to be received at maturity

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Bond Interest Rates

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Issuing Bonds at Par Value

Jan 1 Cash Bonds Payable To issue 9%, 5-years bonds at par

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Issuing Bonds at Par Value

Interest Expense Cash To pay semiannual interest $50,000 9% 6/12 = $2,250

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Issuing Bonds Payable at Par Value

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Issuing Bonds at a Discount

96,149 3,851 100,000

Issuing Bonds Payable at a Discount

$100,000 ( 3,851) 96,149

Discount on Bonds Payable - contra account to Bonds Payable

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Amortization Table on Bonds Issued at a Discount

1/1/2004 7/1/2004 1/1/2005 7/1/2005

$ 4,500 4,500 4,500

$ 4,807 4,823 4,839

307 323 339

$ 3,851 3,544 3,221 2,882

$96,149 96,456 96,779 97,118