Current and LongTerm Liabilities

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Current and Long-Term Liabilities
Chapter 8
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Account for current liabilities and contingent
liabilities.
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Current Liabilities
Current liabilities are obligations due
within one year or within the companys
normal operating cycle if it is longer than one
year.
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Current Liabilities
Accounts payable Short-term notes payable Sales
tax payable Current portion of long-term
debt Accrued expenses Payroll liabilities Unearned
revenues
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Current Liabilities
Accounts payable are amounts owed to
suppliers for goods or services purchased on
account.
Short-term notes payable are notes payable due
within one year.
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Short-Term Notes Payable
In addition to recording the note payable, the
business must also pay interest expense.
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.
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Short-Term Notes Payable
January 30 Inventory 8,000 Notes
Payable 8,000 Purchase of inventory by
issuing a one-year, 10 note
How much interest was accrued as of April 30?
8,000 10 (3/12) 200
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Short-Term Notes Payable
How is the payment at maturity recorded?
January 30 Note Payable 8,000 Interest
Payable 200 Interest Expense
600 Cash 8,800
8,000 10 (9/12) 600
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Accrued Expenses
These are expenses that have been incurred but
not recorded.
Salaries Taxes withheld Interest Utilities
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Payroll Liabilities
Salary Expense 10,000 Employee Income Tax
Payable 1,200 FICA Tax Payable
800 Salary Payable 8,000 To record
salary expense
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Unearned Revenues
Assume that a magazine charges a client 750 for
a three-year subscription.
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Unearned Revenues
January 1 Cash 750 Unearned
Revenue 750 To receive cash for a
three-year subscription
December 31 Unearned Revenue 250 Subscription
Revenue 250 To record revenue earned at the
end of the year
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Unearned Revenues
December 31, Balance
Sheet Year 1 Year 2 Year 3
Current liabilities Unearned subscription
revenue 250 250 -0- Long-term liabilities
Unearned subscription revenue 250 -0- -0-
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Current Liabilities ThatMust Be Estimated
Estimated Warranty Payable
Assume that Black Decker made sales
of 200,000,000 subject to product warranties.
Black Decker estimates that 3 of the
products it sells this year will require repair
or replacement.
What is the estimated warranty expense?
200,000,000 .03 6,000,000
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Estimated Warranty Payable
Warranty Expense 6,000,000 Estimated
Warranty Payable 6,000,000 To accrue warranty
expense
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Estimated Warranty Payable
Assume that defective merchandise totals
5,800,000.
Black Decker will replace it and record the
following
Estimated Warranty Payable 5,800,000 Inventory
5,800,000 To replace defective products
sold under warranty
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Contingent Liabilities
They are a potential liability that depends on a
future event arising out of past events.
FASB Guidelines
1. Record an actual liability if it is probable
that the loss will occur and the amount can
be reasonably estimated.
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Contingent Liabilities
2. Report a contingent liability in the notes
to the financial statement if it is reasonably
possible that a loss or expense will occur.
3. There is no reason to report a contingent
loss that is remote unlikely to occur.
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Bonds An Introduction
A bond is an interest bearing long-term note
payable.
Principal
Interest rate
Payment dates
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Bond Prices
Bond prices are quoted at a percent of their
maturity value.
A quote of 101½ means that a 1,000 bond sells
for 1,000 1.015 1,015.
A 1,000 bond quoted at 883/8 is priced at 1,000
0.88375 883.75.
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Bond Prices
A bond issued at a price above its face (par)
value is issued at a premium.
A bond issued at a price below face (par) value
has a discount.
As a bond nears maturity, its market price moves
toward par value.
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Present Value
The amount invested today receives a
greater amount at a future date, which is called
the present value of a future amount.
It depends upon...
the amount of the future receipt.
the length of time to the future receipt.
the interest rate for the period.
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Bond Interest Rates
Bonds are sold at market price, which is the
amount that investors are willing to pay at any
given time.
Market price represents
present value of the principal to be received at
maturity.
present value of periodic interest payments.
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Bond Interest Rates
Contract rate (stated rate)
Market rate (effective rate)
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Account for bonds payable transactions.
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Issuing Bonds Payable at Par Value
On January 1, Chrysler Corporation
issued 50,000,000 of 9, 5-year bonds at par.
January 1 Cash 50,000,000 Bonds
Payable 50,000,000 To issue 9, 5-year bonds
at par
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Issuing Bonds Payable at Par Value
What is the entry for the interest payment of
July 1?
50,000,000 9 6/12 2,250,000
July 1 Interest Expense 2,250,000 Cash
2,250,000 To pay semiannual interest
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Issuing Bonds Payable at Par Value
What is the entry to accrue interest on December
31?
50,000,000 9 6/12 2,250,000
December 1 Interest Expense 2,250,000
Interest Payable 2,250,000 To accrue
interest
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Issuing Bonds Payableat 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.
Cash 96,149 Discount on Bonds Payable
3,851 Bonds Payable 100,000 To issue 9,
5-year bonds at a discount
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Issuing Bonds Payableat a Discount
Chryslers 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 is a contra account to
Bonds Payable, a decrease in liabilities.
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Measure interest expense.
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Amortization Table on Bonds Issued at a Discount
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Interest Expense on BondsIssued at a Discount
On July 1, 2004, Chrysler makes the first 4,500
semiannual interest payment and also amortizes
(decreases) the bond discount.
July 1, 2004 Interest Expense 4,807 Discount
on Bonds Payable 307 Cash 4,
500 To pay semiannual interest and amortize bond
discount
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Interest Expense on BondsIssued at a Discount
At December 31, 2004, Chrysler accrues interest
and amortizes the bond discount for July through
December.
December 31, 2004 Interest Expense 4,823 Di
scount on Bonds Payable 323 Interest
Payable 4,500 To accrue semiannual
interest and amortize bond discount
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Interest Expense on BondsIssued at a Discount
Chryslers bond accounts as of December 31, 2004.
Bond carrying amount 100,000 3,221 96,779
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Issuing Bonds Payableat 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 104,100 Bonds Payable 100,000
Premium on Bonds Payable 4,100 To issue
9 bonds at a premium
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Issuing Bonds Payableat a Premium
Chryslers 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
Premium on Bonds Payable is added to the
Balance of Bonds Payable to determine the
carrying amount.
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Amortization Table on Bonds Issued at a Premium
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Interest Expense on BondsIssued at a Premium
On July 1, 2004, Chrysler makes the first 4,500
semiannual interest payment and also amortizes
(decreases) the bond premium.
July 1, 2004 Interest Expense 4,164 Premium
on Bonds Payable 336 Cash 4,500
To pay semiannual interest and amortize bond
premium
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Straight-Line Amortization
This method amortizes the bond 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
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Leases
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Long-Term LiabilitiesLeases
Tenant (lessee) makes rent payments to the
property owner (lessor).
Operating
Capital
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Long-Term LiabilitiesLeases
Capital Lease Agreement
It transfers title at the end of the term.
It contains a bargain purchase option.
The lease terms cover 75 or more of
the estimated useful life of the leased asset.
The present value of the lease payments is 90 or
more of the market value of the leased asset.
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End of Chapter 8