Professional Documents
Culture Documents
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C H APT ER
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Liabilities
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Obligations resulting from past transactions
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Current Liabilities
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Expected to be paid:
From existing current assets or through the creation of other current liabilities
Within one year
Debts that do not meet both criteria are classified as noncurrent (or long-term) liabilities
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Current Liabilities
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Types of current liabilities include:
Bank indebtedness from operating lines of credit
Accounts payable and accrued liabilities Unearned revenue
Payroll
Current portion of non-current debt
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Sales Taxes
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Expressed as % of the sales price
Provincial Sales Tax (PST 8% or QST) and
Goods and Services Tax (GST 5%) OR Harmonized Sales Tax (HST 13%)
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Property Taxes
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Businesses that own property pay property taxes for each calendar year to municipal or provincial governments Property taxes are calculated at a specified rate for every $100 of the assessed valued of the property
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Payroll
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Three types of liabilities related to employee salaries and wages:
1. Salary and wages owed to employees (known as gross pay or gross earnings) 2. Payroll deductions required by law to be withheld from employees gross pay
Employees gross pay less payroll deductions is known as net pay (or take home pay)
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Workers compensation
Employee benefits:
Compensated absences (vacation, statutory holidays, sick days) Employer-sponsored health plans and pensions
Employers share of these costs is recorded as an employment benefits expense Until payroll deductions and costs are remitted to third parties (whom they are collected for), they are reported as current liabilities
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Copyright John Wiley & Sons Canada, Ltd.
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Discussion Question
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What is the difference between an Accounts Payable and a Notes Payable?
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($100,000 x 6% x 1/12)
(To accrue interest payable for 1-mth on HSBC loan)
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($100,000 x 6% x 3/12)
(To accrue interest payable for April, May, and June) Bank Loan Payable Interest Payable Cash 100,000 2,000 102,000
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The portion of non-current (long-term) debt that is due within the current year or operating cycle should be classified as a current liability Journal entry is not required to recognize this classification
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Non-Current Liabilities
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Obligations to be paid after one or more years classified as non-current Also known as financial liabilities (a type of financial instrument):
A contractual obligation to pay cash in the future
Includes long-term notes, bonds, and lease obligations May be secured or unsecured:
Secured notes are also known as mortgages
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Bonds Payable
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A form of interest-bearing notes payable
Most have a fixed interest rate (coupon rate) May be secured or unsecured Payable at maturity or in installments
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Bond Trading
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Convertible bonds can be converted to common shares at a stated price Bonds can also be traded on stock exchanges:
Bond prices are quoted as a percentage of the face value of the bonds (i.e. $1,000 bond with quoted
price of $97 sells at price 97% of face value or $970)
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Terminology
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Face value:
Amount of principal due at maturity
Present value:
Value today of: 1. Bond face value to be received at maturity, and 2. Interest payments to be received periodically The value today is dependent upon when the amounts are to be received, and the market rate on interest
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Interest use Table 2 (PV of an annuity of $1) to calculate the present value of bond interest
= PV annuity factor x periodic interest payment (payment calculated using coupon rate)
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Number of periods Market interest rate per period Present value Interest payment per period Future value
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Assume that on January 1, 2012 ABC Company Ltd., sells $1 million, five-year, 5% bonds at 95.7345 of face value. The market (effective) interest rate is 6% with interest payable on July 1 and January 1.
What is the present value of the bonds (issue price)?
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Difference between interest expense (at the market rate or yield) and interest paid (at the coupon rate) is the discount to be amortized
What is the interest expense and paid for the first period? What is the discount to be amortized? What is the entry to record the payment of bond interest and amortization of bond discount (on 1st interest date)? What is the new carrying amount of the bonds? Any adjusting entries at Dec 31 (year-end) required?
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Difference between interest expense (at the market rate or yield) and interest paid (at the coupon rate) is the premium to be amortized
What is the interest expense and paid for the first period? What is the premium to be amortized? What is the entry to record the payment of bond interest and amortization of bond premium (on 1st interest date)? What is the new carrying amount of the bonds? Any adjusting entries at Dec 31 (year-end) required?
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Carrying Amount
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Carrying amount is face value of bond (-/+) unamortized discount/premium OR
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Statement Presentation
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Current liabilities
Reported as the first category of liabilities
Can be listed separately on statement of financial position or detailed in the notes
Non-current liabilities
Report separately in statement of financial position and detail in notes Measured and reported at amortized cost
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Uncertain Liabilities
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Events with uncertain outcomes:
Who is owed
When it is owed, and/or How much is owed
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