Plain Background Power Point Slides Chapter 8 Current and Long Term Liabilities 3366

Current and Long-Term
Liabilities
Chapter 8
1
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 1
Account for current liabilities and
contingent liabilities.
2
Current Liabilities
Obligations due within one year
or within company’s normal
operating cycle if it is longer
 Known amount
 Estimated amount
3
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 1-
year, 10% note payable. The fiscal
year ends on April 30.
General Journal
Date Accounts and Explanations PR Debit Credit
Jan 30 Inventory 8,000
Notes Payable 8,000
Purchased inventory by issuing
a one-year, 10% note

How much interest was accrued as of April 30?
$8,000 × 10% × (3/12) = $200

General Journal
Apr 30 Interest Expense 200
Interest Payable 200
To accrue interest at year-end

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

Sales Tax Payable
One day’s sales at a Home Depot
Store totaled $200,000. The business
collected an additional 5% in sales
tax. Record the day’s sales.
General Journal
Cash ($200,000 X 1.05) 210,000
Sales Revenue 200,000
Sales Tax Payable 10,000
To record cash sales and related
sales tax
Current Installment of
Long-Term Debt
Amount of the principal that is
payable within one year
9
Accrued Expenses
Expenses that have been
incurred but not recorded
 Salaries
 Taxes withheld
 Interest
 Utilities
10
Payroll Liabilities
General Journal
Salary Expense 10,000
Employee Income Tax Payable 1,200
FICA Tax Payable 800
Salary Payable 8,000
To record salary expense

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
General Journal
Jan 1 Cash 750
Unearned Revenue 750
To record receipt for a 3-year
subscription
Dec 31 Unearned Revenue 250

Subscription Revenue 250
To record revenue earned at
year-end (750 x 12/36 months)

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

General Journal
Warranty Expense 6,000
Estimated Warranty Payable 6,000
To accrue warranty expense

Estimated Warranty Payable
Defective merchandise totals
$5,800. Black & Decker will
replace it and record the
following:
General Journal
Estimated Warranty Payable 5,800
Inventory 5,800
To replace defective products
sold under warranty

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 101½ 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.
General Journal
Jan 1 Cash 50,000
Bonds Payable 50,000
To issue 9%, 5-years bonds at par

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

Issuing Bonds Payable at Par
Value
General Journal
Dec 31 Interest Expense 2,250
Interest Payable 2,250
To accrue interest
$50,000 × 9% × 6/12 = $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.
General Journal
Jan 1 Cash 96,149
Discount on Bonds Payable 3,851
To issue 9%, 5-years bonds at a
discount.
Issuing Bonds Payable
at a Discount
Chrysler’s balance sheet immediately
after issuance of the bonds:
Total current liabilities $ XXX
Long-term liabilities:
Bonds payable, 9%, due 2009 $100,000
Discount on bonds payable ( 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
Discount Discount Bond
Interest Interest Interest Amortiza- Account Carrying
Date Payment Expense tion Balance Amount
1/1/2004 $ 3,851 $96,149
7/1/2004 $ 4,500 $ 4,807 $ 307 3,544 96,456
1/1/2005 4,500 4,823 323 3,221 96,779
7/1/2005 4,500 4,839 339 2,882 97,118
1/1/2009 4,500 4,961 461 -0- 100,000

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

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

Chrysler’s 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
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.
General Journal
Cash 104,100
Premium on Bonds Payable 4,100
To issue 9%, 5-years bonds at a
premium.
at a Premium
Chrysler’s balance sheet immediately
after issuance of the bonds:
Total current liabilities $ XXX
Long-term liabilities:
Bonds payable $100,000
Premium on bonds payable 4,100 $104,100

Amortization Table on Bonds
Premium Premium Bond
Interest Interest Interest Amortiza- Account Carrying
Date Payment Expense tion Balance Amount
1/1/2004 $ 4,100 $104,100
7/1/2004 $ 4,500 $ 4,164 $ 336 3,764 103,764
1/1/2005 4,500 4,151 349 3,415 103,415
7/1/2005 4,500 4,137 363 3,052 103,052
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
General Journal
Premium on Bonds Payable 336
Cash 4,500
To pay semiannual interest &
amortize bond premium

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 99¼.
42
Early Retirement of Bonds
Payable
Par value of bonds $70,000
Less: Unamortized discount ( 350)
Carrying amount of the bonds $69,650
Market price ($70,000 × 0.9925) 69,475
Extraordinary gain on retirement $ 175
General Journal
Cash 69,475
Gain on Retirement of Bonds 175
To record bond retirement
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.
General Journal
Notes Payable 125,000
Common Stock 4,000
Paid-in Capital 121,000
To record conversion of notes
payable

Understand the advantages and
disadvantages of borrowing.
45
Financing Operations
With Bonds or Stocks
Issuing Stock Issuing Notes or Bonds
No liabilities Does not dilute stock

No interest expense ownership or control
Less risky to Results in higher

corporation earningsper share
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 plan’s
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 $1,976
Accrued salaries and related expenses 627
Sales tax payable 298
Other accrued expenses 1,402
Income taxes payable 78
Current installments of long-term debt 4
Total current liabilities $4,385
Long-term debt 1,545
Other long-term liabilities 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 Year Ended
Amounts in millions December 31
Cash Flow from Financing Activities:
Borrowing by using commercial paper $754
Proceeds from long-term borrowings 32
Payment of long-term debt (29)
Proceeds from issuance of common stock 351
Payments of cash dividends (371)
Other, net (4)
Net cash provided by financing activities $733

End of Chapter 8
55

Plain Background Power Point Slides Chapter 8 Current and Long Term Liabilities 3366

Uploaded by

Document Information

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

Plain Background Power Point Slides Chapter 8 Current and Long Term Liabilities 3366

Uploaded by

Copyright:

Available Formats

Current and Long-Term

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

$8,000 × 10% × (3/12) = $200

©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

Dec 31 Unearned Revenue 250

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

$200,000 × .03 = $6,000

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

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

A $1,000 bond quoted at 88-3/8 sells

©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

Discount on Bonds Payable - contra account

1/1/2009 4,500 4,961 461 -0- 100,000

©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

Bonds Payable Discount on Bonds Payable

100,000 3,851 307 July 1

Bond carrying amount: $100,000 – $3,221 = $96,779

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

1/1/2009 4,500 3,955 545 -0- 100,000

©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

No liabilities Does not dilute stock

Less risky to Results in higher

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

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

You might also like