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08
- 1. Accounts Payable,Accounts Payable, Commitments,Commitments, Contingencies, and RisksContingencies, and Risks Chapter 8
- 2. Types of Current Liabilities • Current liabilities are short-term obligations that usually must be paid from current assets within a year.
- 3. Three Types of Current Liabilities • Obligations to pay cash to another entity • Obligations to provide goods or services to another entity • Obligations to honor product warranties
- 5. Accounts Payable • Accounts payable represent debts that the firm incurs in purchasing inventories and supplies, as well as amounts that the firm owes for other services used in its operations.
- 7. Discounts • Suppliers often offer discounts to induce early payment.
- 8. Discounts • If a company purchases $5,000 of supplies with terms of 2/10, n/30 and intends to pay within the discount period, then it generally records the purchase at the net price (in this case, $4,900).
- 9. Discounts • If the company fails to pay within the discount period and must remit the full $5,000, then the $100 discount not taken becomes interest expense.
- 10. Discounts
- 11. Discounts
- 12. Notes Payable • Notes payable are more formal promises to pay a lender. • They are usually in writing and involve payment of interest.
- 13. Notes Payable • Notes may be interest-bearing.
- 14. Notes Payable • When a borrower goes to a bank to borrow $50,000, he is given the entire $50,000.
- 15. Notes Payable • At the maturity date, he must repay not only the principal of $50,000 but also interest.
- 18. Discounted Note • Notes may also be discounted.
- 19. Discounted Note • A firm signs a note, with an interest rate of 10%, promising to repay $50,000 in six months, but receives only $47,500.
- 20. Discounted Note • The bank has deducted the interest ($50,000 X .10 X 6/12) at the time of the borrowing.
- 21. Discounted Note • Despite the receipt of $47,500, the company must repay $50,000 at the maturity date.
- 22. Discounted Note • At that time the company will recognize interest expense of $2,500.
- 23. Discounted Note
- 24. Discounted Note
- 25. Accrued Liabilities • Accrued liabilities represent expenses that have been incurred prior to the balance sheet date which have been neither paid nor included with liabilities as of the balance sheet date.
- 26. Accrued Liabilities • An adjustment, increasing both an expense and a liability, must be made at the balance sheet date.
- 27. Accrued Liabilities • For many companies, these accrued liabilities include accrued wages and salaries and accrued vacation and sick pay.
- 30. Long-Term Debts • Long-term debts often have a current portion or become current as time goes by.
- 31. Long-Term Debts • An example of the current portion is a 30-year mortgage — each mortgage payment consists of both principal and interest.
- 32. Long-Term Debts • On the balance sheet date, the principal component of the next 12 payments must be classified as a current liability.
- 33. Long-Term Debts • An example of the become current is a 5-year note payable, a long-term liability.
- 34. Long-Term Debts • Twelve months before the maturity date, the entire note must be classified as a current liability.
- 35. Accrued Income Taxes • Accrued income taxes are certainly a current liability because they are due within one year and generally sooner than that.
- 36. Restructuring Costs • Restructuring costs occur when a company decides to downsize and to refocus its operations.
- 37. Restructuring Costs • When a firm decides to restructure, the total estimated costs of restructuring are expensed in the current year.
- 38. Restructuring Costs • This involves increasing both an expense and a liability.
- 41. Advance Payments from Customers • A company may also have obligations to provide goods or services.
- 42. Advance Payments from Customers • A magazine publisher is a good example.
- 43. Advance Payments from Customers • When a person subscribes to take the magazine for one year, the company receives the entire year's subscription amount in advance.
- 44. Advance Payments from Customers • The Cash account is increased, as is a liability account called Advance Payments from Customers.
- 45. Advance Payments from Customers • The liability represents the company's obligation to provide the subscriber not with money but with a magazine each month over the next twelve months.
- 46. Advance Payments from Customers • As each magazine is sent, the company reduces its liability and finally recognizes revenue.
- 50. Obligations for Warranties • Companies usually stand behind the quality of the products they sell and offer to repair defective products or to refund the purchase price.
- 51. Obligations for Warranties • The matching principle dictates that these possible costs must be matched with current sales revenues.
- 52. Obligations for Warranties • The future costs must be estimated and recorded in the period of the sale.
- 53. Obligations for Warranties • This will involve an increase in both Warranty Expense and Warranty Obligation.
- 54. Obligations for Warranties • Estimates are derived from the company's past experience and from industry averages.
- 57. Accounts Payable,Accounts Payable, Commitments,Commitments, Contingencies, and RisksContingencies, and Risks End of Chapter 8