Cost Accounting Chapter 10

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  • Cost Accounting Chapter 10

    1. 1. Slide 0-1 Chapter LIABILITIES 10 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    2. 2. Slide 0-2 The Nature of Liabilities Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or less Maturity > 1 year Current Noncurrent Liabilities Liabilities I.O.U. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    3. 3. Slide 0-3 Distinction Between Debt and Equity The acquisition of assets is financed from two sources: DEBT EQUITY Funds from creditors, with Funds from a definite due date, and owners sometimes bearing McGraw-Hill/Irwin interest. © The McGraw-Hill Companies, Inc., 2002
    4. 4. Slide 0-4 Liabilities – Question Devon Mfg. borrows $100,000 from First Bank. The loan will be repaid in 20 years and has an annual interest rate of 8%. Is this a current liability or a noncurrent liability? The obligation will not be paid within one year or one operating cycle, so it is a noncurrent liability. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    5. 5. Slide 0-5 Evaluating Liquidity An important indicator of a company’s ability to meet its current obligations. Two commonly used measures: Working Capital = Current Assets - Current Liabilities Current Ratio = Current Assets ÷ Current Liabilities McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    6. 6. Slide 0-6 Liabilities – Question Devon Mfg. has current liabilities of $230,000 and current assets of $322,000. What is Devon’s current ratio? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    7. 7. Slide 0-7 Accounts Payable Short-term obligations to suppliers for purchases of merchandise and to others for goods and services. Office Merchandise supplies inventory invoices invoices Utility and Shipping phone bills charges McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    8. 8. Slide 0-8 Notes Payable When a company borrows money, a note payable is created. Current Portion of Notes Payable The portion of a note payable that is due within one year, or one operating cycle, whichever is longer. Current Notes Payable Total Notes Payable Noncurrent Notes Payable McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    9. 9. Slide 0-9 Notes Payable PROMISSORY NOTE Miami, Fl Nov. 1, 2003 Location Date Six months after this date Porter Company promises to pay to the order of Security National Bank the sum of $10,000.00 with interest at the rate of 12.0% per annum. signed John Caldwell title treasurer McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    10. 10. Slide 0-10 Notes Payable On November 1, 2003, Porter Company would make the following entry. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    11. 11. Slide 0-11 Interest Payable Interest expense is the compensation to the lender for giving up the use of money for a period of time. The liability is called interest payable. To the lender, interest is a Interest Rate revenue. Up! To the borrower, interest is an expense. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    12. 12. Slide 0-12 Interest Payable The interest formula includes three variables that must be considered when computing interest: Interest = Principal × Interest Rate × Time When computing interest for one year, “Time” equals 1. When the computation period is less than one year, then “Time” is a fraction. For example, if we needed to compute interest for 3 months, “Time” would be 3/12. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    13. 13. Slide 0-13 Interest Payable – Example What entry would Porter Company make on December 31, the fiscal year-end? $10,000 × 12% × 2/12 = $200 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    14. 14. Slide 0-14 Payroll Liabilities Gross Pay Net Pay State and Voluntary Medicare Federal Local Income Deductions FICA Taxes Taxes Income Tax Taxes McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    15. 15. Slide 0-15 Unearned Revenue Cash is sometimes collected from the customer before the revenue is actually earned. As the earnings process is completed . . Cash is Deferred Earned received revenue is revenue is in recorded. recorded. advance. a liability account. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin
    16. 16. Slide 0-16 Long-Term Debt Relatively small debt needs can be filled from single sources. or Insurance or Pension Banks Companies Plans McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    17. 17. Slide 0-17 Long-Term Debt Large debt needs are often filled by issuing bonds. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    18. 18. Slide 0-18 Installment Notes Payable Long-term notes that call for a series of installment payments. Each payment covers With each payment, the interest for the period interest portion gets AND a portion of the smaller and the principal principal. portion gets larger. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    19. 19. Slide 0-19 Allocating Installment Payments Between Interest and Principal – Identify the unpaid principal balance. — Unpaid Principal × Interest rate = Interest expense. ˜ Installment payment - Interest expense = Reduction in unpaid principal balance. ™ Compute new unpaid principal balance. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    20. 20. Slide 0-20 Allocating Installment Payments Between Interest and Principal On January 1, 2003, Rocket Corp. borrowed $7,581.57 from First Bank of River City. The loan was a five-year loan and had an interest rate of 10%. The annual payment is $2,000. Prepare an amortization table for Rocket Corp.’s loan. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    21. 21. Slide 0-21 Allocating Installment Payments Between Interest and Principal Now, prepare the entry for the first payment on December 31, 2003. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    22. 22. Slide 0-22 Allocating Installment Payments Between Interest and Principal The information needed for the journal entry can be found on the amortization table. The payment amount, the interest expense, and the amount to credit to principal are all on the table. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    23. 23. Slide 0-23 Bonds Payable qBonds usually involve the borrowing of a large sum of money, called principal. qThe principal is usually paid back as a lump sum at the end of the bond period. qIndividual bonds are often denominated with a par value, or face value, of $1,000. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    24. 24. Slide 0-24 Bonds Payable Bonds usually carry a stated rate of interest, also called a contract rate. Interest is normally paid semiannually. Interest is computed as: Interest = Principal × Stated Rate × Time McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    25. 25. Slide 0-25 Bonds Payable Bonds are issued through an intermediary called an underwriter. Bonds can be sold on organized securities exchanges. Bond prices are usually quoted as a percentage of the face amount.  For example, a $1,000 bond priced at 102 would sell for $1,020. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    26. 26. Slide 0-26 Types of Bonds Mortgage Debenture Bonds Bonds Convertible Junk Bonds Bonds McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    27. 27. Slide 0-27 Accounting for Bonds Payable On January 1, 2003, Rocket Corp. issues $1,500,000 of 12%, 10-year bonds payable. Interest is payable semiannually, each July 1 and January 1. Assume the bonds are issued at face value. Record the issuance of the bonds. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    28. 28. Slide 0-28 Accounting for Bonds Payable Record the interest payment on July 1, 2003. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    29. 29. Slide 0-29 Bonds Sold Between Interest Dates Bonds are often sold between interest dates. The selling price of the bond is computed as: McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    30. 30. Slide 0-30 The Concept of Present Value $1,000 In 5 years it In 25 years it invested will be worth will be worth today at 10%. $1,610.51. $10,834.71! Present Future Value Money can grow over time, Value because it can earn interest. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    31. 31. Slide 0-31 The Concept of Present Value How much is a future amount worth today? Three pieces of information must be known to solve a present value problem: Present future amount. – The Interest compounding periods Future Value Value — The interest rate (i). ˜ The number of periods (n) the amount will be Today invested. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    32. 32. Slide 0-32 The Concept of Present Value Two types of cash flows are involved with bonds: Periodic interest payments called annuities. Today Maturity Principal payment at maturity. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    33. 33. Slide 0-33 The Present Value Concept and Bond Prices The selling price of the bond is determined by the market based on the time value of money. = = < < > > McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    34. 34. Slide 0-34 Early Retirement of Debt B o n d s c a n b e re tire d b y . . . E x e r c is in g a c a ll P u r c h a s in g th e p r o v is io n . b o n d s o n th e o p e n m a rk e t. Gains or losses incurred as a result of retiring bonds should be reported as extraordinary items on the income statement. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    35. 35. Slide 0-35 Lease Payment Obligations Operating Leases Capital Leases Lease agreement transfers Lessor retains risks and risks and benefits benefits associated with associated with ownership ownership. to lessee. Lessee records rent Lessee records a leased expense as incurred. asset and lease liability. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    36. 36. Slide 0-36 Capital Lease Criteria A le a s e m u s t b e r e c o r d e d a s a C a p ita l L e a s e if it m e e ts a n y o f th e fo llo w in g c r ite r ia . T h e le a s e tr a n s fe r s T h e le a s e c o n ta in s o w n e r s h ip to th e a b a r g a in p u r c h a s e le s s e e . o p tio n . T h e le a s e te r m is e q u a l to T h e P V o f th e m in im u m o r > 7 5 % o f th e e c o n o m ic le a s e p a y m e n ts = 9 0 % o f life o f th e p r o p e r ty . th e F M V o f th e p ro p e rty . McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    37. 37. Slide 0-37 Pensions Employers offer pension plans to employees. The employer makes payments to a pension fund. Usually, this is an Retirees receive independent entity pension managed by a payments from professional fund the pension manager. fund. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    38. 38. Slide 0-38 Pensions Actuaries make the pension expense computations, based on: q Average age, retirement age, life expectancy. q Employee turnover rates. q Compensation levels. q Expected rate of return for the fund. The accountant then posts the entry to record pension expense and pension liability. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    39. 39. Slide 0-39 Other Postretirement Benefits Many companies offer benefits to retirees other than pensions, such as health coverage or fitness club memberships. Amount to Current be funded liability Unfunded liability next year for nonpension postretirement benefits Remainder Long-term of unfunded liability amount McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    40. 40. Slide 0-40 Deferred Income Taxes Corporations pay income taxes quarterly. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    41. 41. Slide 0-41 Deferred Income Taxes The Internal Revenue GAAP is the set of Code is the set of rules for preparing rules for preparing tax financial statements. returns. Results in . . . Usually. . . Results in . . . Financial statement IRS income taxes income tax expense. payable. The difference between tax expense and tax payable is recorded in an account called deferred taxes. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    42. 42. Slide 0-42 Deferred Income Taxes – Example Examine the December 31, 2003, information for X-Off Inc. X-Off uses straight-line depreciation for financial reporting and accelerated depreciation for income tax reporting. X-Off’s tax rate is 30%. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    43. 43. Slide 0-43 Deferred Income Taxes – Example Compute X-Off’s income tax expense and income tax payable. Income Tax The income tax Statement Return Difference amount computed Revenues $ 1,000,000 Less: based on financial Depreciation 200,000 statement income Other expenses 650,000 is income tax Income before taxes $ 150,000 expense for the × Tax rate 30% period. Income taxes $ 45,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    44. 44. Slide 0-44 Deferred Income Taxes – Example Compute X-Off’s income tax expense and income tax payable. Income Tax Statement Return Difference Income taxes Revenues $ 1,000,000 $ 1,000,000 based on tax Less: Depreciation 200,000 320,000 return Other expenses 650,000 650,000 income are Income before taxes $ 150,000 $ 30,000 the taxes payable for × Tax rate 30% 30% the period. Income taxes $ 45,000 $ 9,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    45. 45. Slide 0-45 Deferred Income Taxes – Example The deferred tax for the period of $36,000 is the difference between income tax expense of $45,000 and income tax payable of $9,000. Income Tax Statement Return Difference Revenues $ 1,000,000 $ 1,000,000 $ - Less: Depreciation 200,000 320,000 (120,000) Other expenses 650,000 650,000 - Income before taxes $ 150,000 $ 30,000 $ 120,000 × Tax rate 30% 30% 30% Income taxes $ 45,000 $ 9,000 $ 36,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    46. 46. Slide 0-46 Financial Leverage Borrowing at one If we borrow rate and investing $1,000,000 at 8% and invest it at 10%, we at a higher rate. will clear $20,000 profit! McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    47. 47. Slide 0-47 End of Chapter 10 Are we having fun yet? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

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