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  • 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
  • Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • Transcript

    • 1.  
    • 2.
      • Reporting and
      • Analyzing Liabilities
      Accounting, Third Edition
    • 3.
      • Explain a current liability and identify the major types of current liabilities.
      • Describe the accounting for notes payable.
      • Explain the accounting for other current liabilities.
      • Identify the types of bonds.
      • Prepare the entries for the issuance of bonds and interest expense.
      • Describe the entries when bonds are redeemed.
      • Identify the requirements for the financial statement presentation and analysis of liabilities.
      • Apply the straight-line method of amortizing bond discount and bond premium.
      • Apply the effecive-interest method of amortizing bond discount and bond premium.
      • Describe the accounting for long-term notes payable.
      Study Objectives
    • 4. Current Liabilities Bonds: Long-Term Liabilities Accounting for Bond Issues Accounting for Bond Retirements Financial Statement Presentation and Analysis Reporting and Analyzing Liabilities
      • What is a current liability?
      • Notes payable
      • Sales taxes payable
      • Unearned revenues
      • Current maturities of long-term debt
      • Payroll and payroll taxes payable
      • Types of bonds
      • Issuing procedures
      • Determining the market value of bonds
      • Issuing bonds at face value
      • Discount or premium on bonds
      • Issuing bonds at a discount
      • Issuing bonds at a premium
      • Redeeming bonds at maturity
      • Redeeming bonds before maturity
      • Balance sheet presentation
      • Analysis
      • Off-balance-sheet financing
    • 5. Current Liabilities
      • Current liability is debt with two key features:
        • Company expects to pay the debt from existing current assets or through the creation of other current liabilities .
        • Company will pay the debt within one year or the operating cycle, whichever is longer.
      SO 1 Explain a current liability and identify the major types of current liabilities. Current liabilities include notes payable , accounts payable , unearned revenues , and accrued liabilities such as taxes , salaries and wages , and interest payable .
    • 6. Current Liabilities
      • To be classified as a current liability, a debt must be expected to be paid:
        • out of existing current assets.
        • by creating other current liabilities.
        • within 2 years.
        • both (a) and (b).
      Question SO 1 Explain a current liability, and identify the major types of current liabilities.
    • 7. Current Liabilities SO 2 Describe the accounting for notes payable. Notes Payable
        • Written promissory note.
        • Require the borrower to pay interest.
        • Those due within one year of the balance sheet date are usually classified as current liabilities.
    • 8. Current Liabilities Illustration: First National Bank agrees to lend $100,000 on September 1, 2010, if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1. When a company issues an interest-bearing note, the amount of assets it receives generally equals the note’s face value. Notes payable 100,000 Cash 100,000 SO 2 Describe the accounting for notes payable. Sept. 1
    • 9. Current Liabilities Illustration: If Cole Williams Co. prepares financial statements annually, it makes an adjusting entry at December 31 to recognize interest. Interest payable 4,000 Interest expense 4,000 * SO 2 Describe the accounting for notes payable. Dec. 31 * $100,000 x 12% x 4/12 = 4,000
    • 10. Current Liabilities Illustration: At maturity (January 1), Cole Williams Co. must pay the face value of the note plus interest. It records payment as follows. Interest payable 4,000 Notes payable 100,000 SO 2 Describe the accounting for notes payable. Jan. 1 Cash 104,000
    • 11. Current Liabilities SO 3 Explain the accounting for other current liabilities. Sales Tax Payable
        • Sales taxes are expressed as a stated percentage of the sales price.
        • Retailer collects tax from the customer.
        • Retailer remits the collections to the state’s department of revenue.
    • 12. Current Liabilities Illustration: March 25, cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is: SO 3 Explain the accounting for other current liabilities. Mar. 25 Sales 10,000 Cash 10,600 Sales tax payable 600
    • 13. Current Liabilities Illustration: Cooley Grocery rings up total receipts of $10,600. Because the amount received from the sale is equal to the sales price 100% plus 6% of sales, (sales tax rate of 6%), the journal entry is: SO 3 Explain the accounting for other current liabilities. Mar. 25 Sales 10,000 Cash 10,600 Sales tax payable 600 Sometimes companies do not ring up sales taxes separately on the cash register. * $10,600 / 1.06 = 10,000 *
    • 14. Current Liabilities SO 3 Explain the accounting for other current liabilities. Unearned Revenue
      • Revenues that are received before the company delivers goods or provides services.
        • Company debits Cash, and credits a current liability account (unearned revenue).
        • When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account.
    • 15. Current Liabilities Illustration: Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The entry for the sales of season tickets is: SO 3 Explain the accounting for other current liabilities. Unearned ticket revenue 500,000 Cash 500,000 Aug. 6 Ticket revenue 500,000 Unearned ticket revenue 500,000 Sept. 7 Superior records the earning of revenue with the following entry.
    • 16. Current Liabilities
      • Illustration: Wendy Construction issues a five-year, interest-bearing $25,000 note on January 1, 2009. This note specifies that each January 1, starting January 1, 2010, Wendy should pay $5,000 of the note. When the company prepares financial statements on December 31, 2009,
        • What amount should be reported as a current liability? _________
        • What amount should be reported as a long-term liability? _______
      Current Maturities of Long-Term Debt
        • Portion of long-term debt that comes due in the current year.
        • No adjusting entry required.
      SO 3 Explain the accounting for other current liabilities. $5,000 $20,000
    • 17. Current Liabilities The term “payroll” pertains to both: Salaries - managerial, administrative, and sales personnel (monthly or yearly rate). Wages - store clerks, factory employees, and manual laborers (rate per hour). Determining the payroll involves computing three amounts: (1) gross earnings , (2) payroll deductions , and (3) net pay . SO 3 Explain the accounting for other current liabilities. Payroll and Payroll Taxes Payable
    • 18. Current Liabilities Illustration: Assume Cargo Corporation records its payroll for the week of March 7 as follows: Salaries and wages expense 100,000 Federal tax payable 21,864 FICA tax payable 7,650 State tax payable 2,922 Salaries and wages payable 67,564 SO 3 Explain the accounting for other current liabilities. Cash 67,564 Salaries and wages payable 67,564 Mar. 7 Record the payment of this payroll on March 7. Mar. 7
    • 19. Current Liabilities Payroll tax expense results from three taxes that governmental agencies levy on employers .
      • These taxes are:
      • FICA tax
      • Federal unemployment tax
      • State unemployment tax
      SO 3 Explain the accounting for other current liabilities.
    • 20. Current Liabilities Illustration: Based on Cargo Corp.’s $100,000 payroll, the company would record the employer’s expense and liability for these payroll taxes as follows. Payroll tax expense 13,850 State unemployment tax payable 800 FICA tax payable 7,650 Federal unemployment tax payable 5,400 SO 3 Explain the accounting for other current liabilities.
    • 21. Current Liabilities
      • Employer payroll taxes do not include:
        • Federal unemployment taxes.
        • State unemployment taxes.
        • Federal income taxes.
        • FICA taxes.
      Question SO 3 Explain the accounting for other current liabilities.
    • 22. Bond: Long-Term Liabilities Bonds are a form of interest-bearing notes payable issued by corporations, universities, and governmental agencies. Sold in small denominations (usually $1,000 or multiples of $1,000). SO 4 Identify the types of bonds.
    • 23. Bond: Long-Term Liabilities
      • Types of Bonds
        • Secured
        • Unsecured
        • Convertible
        • Callable
      SO 4 Identify the types of bonds.
    • 24.  
    • 25. Bond: Long-Term Liabilities
      • Issuing Procedures
        • Bond certificate
          • Issued to the investor.
          • Provides information such as the
            • name of the company issuing bonds,
            • face value,
            • maturity date, and
            • contractual interest rate ( stated rate ).
        • Face value - principal due at the maturity.
        • Maturity date - date final payment is due.
        • Contractual interest rate – rate to determine cash interest paid, generally semiannually.
      SO 4 Identify the types of bonds.
    • 26. Bond: Long-Term Liabilities Maturity Date Illustration 10-3 Contractual Interest Rate Face or Par Value Issuer of Bonds SO 4 Identify the types of bonds.
    • 27. Bond: Long-Term Liabilities
      • Determining the Market Value of Bonds
      • Market value is a function of the three factors that determine present value :
        • the dollar amounts to be received,
        • the length of time until the amounts are received, and
        • the market rate of interest.
      The process of finding the present value is referred to as discounting the future amounts. SO 4 Identify the types of bonds.
    • 28. Bond: Long-Term Liabilities Illustration: Assume that Acropolis Company on January 1, 2010, issues $100,000 of 9% bonds, due in five years, with interest payable annually at year-end. Illustration 10-5 Computing the market price of bonds Illustration 10-4 Time diagram depicting cash flows SO 4 Identify the types of bonds.
    • 29. Accounting for Bond Issues
      • A corporation records bond transactions when it
        • issues or retires (buys back) bonds and
        • when bondholders convert bonds into common stock.
      • Bonds may be issued at
        • face value,
        • below face value (discount), or
        • above face value (premium).
        • Bond prices are quoted as a percentage of face value.
      SO 5 Prepare the entries for the issuance of bonds and interest expense.
    • 30. Accounting for Bond Issues
      • The rate of interest investors demand for loaning funds to a corporation is the:
        • contractual interest rate.
        • face value rate.
        • market interest rate.
        • stated interest rate.
      Question SO 5 Prepare the entries for the issuance of bonds and interest expense.
    • 31. Illustration: Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2010, at 100 (100% of face value). The entry to record the sale is: Jan. 1 Cash 100,000 SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at Face Value Bonds payable 100,000 Prepare the entry Devor would make to accrue interest on December 31. Dec. 31 Bond interest expense 10,000 Bond interest payable 10,000
    • 32. Prepare the entry Devor would make to pay the interest on Jan. 1, 2011. Jan. 1 Bond interest payable 10,000 Cash 10,000 SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at Face Value
    • 33. Accounting for Bond Issues 8% 10% 12% Premium Face Value Discount Assume Contractual Rate of 10% SO 5 Prepare the entries for the issuance of bonds and interest expense. Bonds Sold At Market Interest
    • 34. Accounting for Bond Issues
      • Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:
        • the contractual interest rate exceeds the market interest rate.
        • the market interest rate exceeds the contractual interest rate.
        • the contractual interest rate and the market interest rate are the same.
        • no relationship exists between the two rates.
      Question SO 5 Prepare the entries for the issuance of bonds and interest expense.
    • 35. Illustration: Assume that on January 1, 2010, Candlestick Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face value) with interest payable on January 1. The entry to record the issuance is: SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at a Discount Jan. 1 Cash 98,000 Discount on bonds payable 2,000 Bonds payable 100,000 Illustration 10-8 Computation of total cost of borrowing—bonds issued at discount
    • 36. Statement Presentation SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at a Discount Illustration 10-7 Statement presentation of discount on bonds payable
    • 37.
      • Discount on Bonds Payable:
        • has a credit balance.
        • is a contra account.
        • is added to bonds payable on the balance sheet.
        • increases over the term of the bonds.
      Question SO 5 Prepare the entries for the issuance of bonds and interest expense. Issuing Bonds at a Discount
    • 38. Illustration: Assume that the Candlestick Inc. bonds previously described sell at 102 rather than at 98. The entry to record the sale is: SO 5 Prepare the entries for the issuance of bonds and interest expense. Jan. 1 Cash 102,000 Bonds payable 100,000 Premium on bonds payable 2,000 Illustration 10-12 Computation of total cost of borrowing—bonds issued at premium Issuing Bonds at a Premium
    • 39. Statement Presentation SO 5 Prepare the entries for the issuance of bonds and interest expense. Illustration 10-11 Statement presentation of premium on bonds payable Issuing Bonds at a Premium
    • 40. Redeeming Bonds at Maturity SO 6 Describe the entries when bonds are redeemed. Candlestick records the redemption of its bonds at maturity as follows: Accounting for Bond Retirements Bonds payable 100,000 Cash 100,000
    • 41.
      • Redeeming Bonds before Maturity
      • When a company retires bonds before maturity, it is necessary to:
        • eliminate the carrying value of the bonds at the redemption date;
        • record the cash paid; and
        • recognize the gain or loss on redemption.
      The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date. Accounting for Bond Retirements SO 6 Describe the entries when bonds are redeemed.
    • 42.
      • When bonds are redeemed before maturity, the gain or loss on redemption is the difference between the cash paid and the:
        • carrying value of the bonds.
        • face value of the bonds.
        • original selling price of the bonds.
        • maturity value of the bonds.
      Question Accounting for Bond Retirements SO 6 Describe the entries when bonds are redeemed.
    • 43. Illustration: Assume at the end of the fourth period, Candlestick Inc., having sold its bonds at a premium, retires the bonds at 103 after paying the annual interest. Assume that the carrying value of the bonds at the redemption date is $100,400 (principal $100,000 and premium $400). Candlestick records the redemption at the end of the fourth interest period (January 1, 2014) as: Accounting for Bond Retirements Bonds payable 100,000 Premium on bonds payable 400 Loss on bond redemption 2,600 Cash 103,000 SO 6 Describe the entries when bonds are redeemed.
    • 44.
      • When bonds are converted into common stock:
        • a gain or loss is recognized.
        • the carrying value of the bonds is transferred to paid-in capital accounts.
        • the market price of the stock is considered in the entry.
        • the market price of the bonds is transferred to paid-in capital.
      Question Accounting for Bond Retirements SO 6 Describe the entries when bonds are redeemed.
    • 45. Balance Sheet Presentation SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities. Financial Statement Analysis and Presentation Illustration 10-15
    • 46. Analysis SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities. Financial Statement Analysis and Presentation Illustration 10-16
    • 47. Liquidity Financial Statement Analysis and Presentation $99,823 $99,680 = 1.0:1 $91,387 $85,373 = 1.07:1 Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.
    • 48. Solvency Financial Statement Analysis and Presentation $175,678 $275,941 = 64% $13,927+$418+$7,609 $418 = 52.5 times Solvency ratios measure the ability of a company to survive over a long period of time.
    • 49.  
    • 50. Off-Balance-Sheet Financing
        • Contingencies
        • Leasing
          • Operating lease
          • Capital lease
      Financial Statement Analysis and Presentation SO 7 Identify the requirements for the financial statement presentation and analysis of liabilities.
    • 51.  
    • 52. To follow the matching principle, companies allocate bond discount and bond premium to expense in each period in which the bonds are outstanding. Illustration 10A-1 Amortizing Bond Discount and Premium Straight-Line Amortization SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A
    • 53. Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $98,000 (discount of $2,000). Interest is payable on January 1 of each year. Prepare the entry to accrue interest at Dec. 31, 2010. Amortizing Bond Discount Straight-Line Amortization Discount on bonds payable 400 Bond interest expense 10,400 Dec. 31 Bond interest payable 10,000 SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A
    • 54. Illustration 10A-2 Amortizing Bond Discount Straight-Line Amortization SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A
    • 55. Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $102,000 (premium of $2,000). Interest is payable on January 1 of each year. Prepare the entry to accrue interest at Dec. 31, 2010. Amortizing Bond Premium Straight-Line Amortization Premium on bonds payable 400 Bond interest expense 9,600 Dec. 31 Bond interest payable 10,000 SO 8 Apply the straight-line method of amortizing bond discount and bond premium. Appendix 10A
    • 56. Illustration 10A-2 Amortizing Bond Premium Straight-Line Amortization Appendix 10A SO 8 Apply the straight-line method of amortizing bond discount and bond premium.
    • 57. Illustration 10B-1 Under the effective-interest method , the amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value. Required steps:
      • Compute the bond interest expense.
      • Compute the bond interest paid or accrued.
      • Compute the amortization amount.
      Effective-Interest Amortization Appendix 10B
    • 58. Amortizing Bond Discount SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $98,000. The effective-interest rate is 10.53% and interest is payable on Jan. 1 of each year. Prepare the bond discount amortization schedule.
    • 59. Illustration 10B-2 Amortizing Bond Discount SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B
    • 60. Illustration: Candlestick, Inc. records the accrual of interest and amortization of bond discount on Dec. 31, as follows: SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Amortizing Bond Discount Discount on bonds payable 319 Bond interest expense 10,319 Dec. 31 Bond interest payable 10,000
    • 61. Amortizing Bond Premium SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2010, for $102,000. The effective-interest rate is 9.48% and interest is payable on Jan. 1 of each year. Prepare the bond premium amortization schedule.
    • 62. Illustration 10B-4 Amortizing Bond Premium SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B
    • 63. Illustration: Candlestick, Inc. records the accrual of interest and amortization of premium discount on Dec. 31, as follows: SO 9 Apply the effective-interest method of amortizing bond discount and bond premium. Effective-Interest Amortization Appendix 10B Amortizing Bond Premium Premium on bonds payable 330 Bond interest expense 9,670 Dec. 31 Bond interest payable 10,000
    • 64. Long-Term Notes Payable
      • Long-Term Notes Payable
      • May be secured by a mortgage that pledges title to specific assets as security for a loan.
      • Typically, the terms require the borrower to make installment payments over the term of the loan. Each payment consists of
        • interest on the unpaid balance of the loan and
        • a reduction of loan principal.
      • Companies initially record mortgage notes payable at face value.
      SO 10 Describe the accounting for long-term notes payable. Appendix 10C
    • 65. Long-Term Notes Payable Illustration 10C-1 Illustration: Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 2010. The terms provide for semiannual installment payments of $33,231. Appendix 10C SO 10 Describe the accounting for long-term notes payable.
    • 66. Long-Term Notes Payable Illustration: Porter Technology records the mortgage loan and first installment payment as follows: Appendix 10C SO 10 Describe the accounting for long-term notes payable. Mortgage notes payable 500,000 Cash 500,000 Dec. 31 Mortgage notes payable 3,231 Interest expense 30,000 Jun. 30 Cash 33,231
    • 67. Long-Term Notes Payable
      • Each payment on a mortgage note payable consists of:
        • interest on the original balance of the loan.
        • reduction of loan principal only.
        • interest on the original balance of the loan and reduction of loan principal.
        • interest on the unpaid balance of the loan and reduction of loan principal.
      Question Appendix 10C SO 10 Describe the accounting for long-term notes payable.
    • 68. Copyright “ Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”