Professional Documents
Culture Documents
Chapter 10
Reporting and Interpreting
Liabilities
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Learning Objective 1
10-3
Obtains
short-term
loans
Issues
long-term
debt
10-5
Learning Objective 2
10-6
Measuring Liabilities
Initial Amount of the Liability
Cash Value
Increase Liability
10-7
Decrease Liability
Current Liabilities
Accounts Payable
Decreases
Decreases
(Debited)
(Debited)
Increases
Increases
(Credited)
(Credited)
when a company
pays on its account
when a company
receives goods or
services on credit
Accrued Liabilities
Liabilities that have been incurred but not yet paid.
10-8
Calculating Payroll
Payroll Deductions
Payroll
Liabilities
Payroll deductions are either required by law or voluntarily
1.Payroll
requested byDeductions
employees and create a current liability for the
company. Examples include:
1.Income tax
2.Employer
Payroll Taxes
2.FICA tax
3.Other deductions (charitable donations, union dues, etc.)
10-9
Calculating Payroll
10-10
Recording Payroll
Adam Palmer earned gross pay of $600 in the current payroll period.
General Mills withheld $58 in Federal income taxes, $48.80 for FICA, and
$10 for United Way, resulting in net pay of $483.20.
1 Analyze
2 Record
10-11
Payroll Taxes
Employer Payroll Taxes
Employers have other liabilities related to payroll.
1.FICA tax (a matching contribution)
2.Federal unemployment tax
3.State unemployment tax
Assume General Mills was required to contribute $16,400 for FICA, $250
for federal unemployment tax, and $1,350 for state unemployment tax.
1 Analyze
2 Record
10-12
2 Record
10-13
Notes Payable
Four key events occur with any note payable:
1.establishing the note,
2.accruing interest incurred but not paid,
3.recording interest paid, and
4.recording principal paid.
10-14
Notes Payable
1. Establish the note on November 1, 2009.
Assume
Assume that
that on
on November
November 1,
1, 2009,
2009, General
General Mills
Mills borrowed
borrowed $100,000
$100,000 cash
cash
on
on aa one-year
one-year note
note that
that required
required General
General Mills
Mills to
to pay
pay 66 percent
percent interest
interest and
and
$100,000
$100,000 principal,
principal, both
both on
on October
October 31,
31, 2010.
2010.
1 Analyze
2 Record
10-15
Notes Payable
Accrue interest owed but not paid on December 31, 2009.
$100,000
$100,000 6%
6% 2/12
2/12 == $1,000
$1,000 accrued
accrued interest
interest
P
xx II
xx TT
P
1 Analyze
10-16
Record
Notes Payable
Record interest accrued in 2010
$100,000
$100,000 6%
6% 10/12
10/12 == $5,000
$5,000 interest
interest
P
xx II
xx
T
P
T
1 Analyze
10-17
Record
Notes Payable
4. Record principal paid of $100,000 on October 31, 2010.
1 Analyze
2 Record
10-18
Current Portion of
Long-Term Debt
Long-Term Debt
Current Portion of
Long-term Debt
Noncurrent Portion
of Long-term Debt
10-19
10-20
Sales Tax
Payable
Unearned
Revenue
2 Record
When Best Buy pays the sales tax to the state government, its accountants
will reduce Sales Tax Payable (with a debit) and reduce Cash (with a credit).
10-21
Additional Liabilities
On
On October
October 11 IAC,
IAC, an
an internet
internet provider,
provider, received
received $30
$30 cash
cash for
for threethreemonths
months of
of internet
internet access,
access, paid
paid in
in advance.
advance.
1 Analyze
2 Record
10-22
Additional Liabilities
At
At the
the end
end of
of October,
October, IAC
IAC provided
provided one
one month
month of
of internet
internet service
service
to
to its
its customer.
customer.
$30 3 months = $10 per month
1 Analyze
2 Record
10-23
Learning Objective 3
10-24
Long-Term Liabilities
Common Long-Term Liabilities
1. Long-term notes payable
2. Deferred income taxes
3. Bonds payable
Bonds are financial instruments that outline the
future payments a company promises to make
in exchange for receiving a sum of money now.
10-25
Bonds
Key Elements of a Bond
1. Maturity date
2. Face value
3. Stated interest rate
Interest Computation
12
$1,000 6% 12 = $60
Bond Pricing
The bond price involves present value computations and is the amount
that investors are willing to pay on the issue date for the bonds.
10-26
Bonds
Balance Sheet Reporting of Bond Liability
10-27
Bonds
Bonds Issued at Face Value
General
receives $100,000
cash in
in exchange
General Mills
Mills receives
$100,000 cash
exchange for
for issuing
issuing
100
100 bonds
bonds at
at their
their $1,000
$1,000 face
face value,
value, so
so the
the bonds
bonds are
are issued
issued at
at
total
total face
face value
value (1,000
(1,000 $1,000
$1,000 == $100,000).
$100,000).
1 Analyze
2 Record
10-28
Bonds
Bonds Issued at a Premium
General
General Mills
Mills issues
issues 100
100 of
of its
its $1,000
$1,000 bonds
bonds at
at aa price
price of
of
107.26
107.26 (percent)
(percent) of
of face
company will
will receive
receive
face value,
value, the
the company
$107,260
$107,260 (100
(100 $1,000
$1,000 1.0726).
1.0726).
1 Analyze
10-29
Record
Bonds
Bonds Issued at a Discount
General
General Mills
Mills receives
receives $93,376
$93,376 for
for bonds
bonds with
with aa total
total face
face value
value of
of
$100,000,sold
$100,000,sold at
at 93.376
93.376 the
the cash-equivalent
cash-equivalent amount
amount is
is $93,376,
$93,376, which
which
represents
represents the
the liability
liability on
on that
that date.
date. These
These bonds
bonds are
are issued
issued at
at aa
discount
discount because
because the
the cash
cash received
received is
is less
less than
than the
the face
face value
value of
of the
the
bonds.
bonds.
1 Analyze
$100,000
$100,000 -- $93,376
$93,376 == $6,624
$6,624 discount
discount
2 Record
10-30
2 Record
10-31
$100,000
$100,000 6%
6% 1/12
1/12 == $500
$500 interest
interest
10-32
10-33
Bond Retirement
The early retirement of bonds has three financial effects. The company
1. pays cash,
2. eliminates the bond liability, and
3. reports either a gain or a loss.
Assume
Assume that
that in
in 2000,
2000, General
General Mills
Mills issued
issued $100,000
$100,000 of
of bonds
bonds at
at face
face value.
value.
Ten
Ten years
years later,
later, in
in 2010,
2010, the
the company
company retired
retired the
the bonds
bonds early.
early. At
At the
the time,
time,
the
the bond
bond price
price was
was 103,
103, so
so General
General Mills
Mills made
made aa payment
payment of
of $103,000.
$103,000.
1 Analyze
2 Record
10-34
Cash Payment
$103,000
Carrying Value
100,000
Loss on Retirement
$3,000
Learning Objective 4
10-35
Contingent Liabilities
Contingent liabilities are potential liabilities that arise from past
transactions or events, but their ultimate resolution depends
(is contingent) on a future event.
10-36
Learning Objective 5
10-37
10-38
Quick Ratio =
$661 + 0 + 1,082
4,856
0.359
A
A quick
quick ratio
ratio of
of 0.359
0.359 implies
implies that
that General
General Mills
Mills would
would
be
be able
able to
to pay
pay only
only 35.9
35.9 percent
percent of
of its
its current
current
liabilities,
liabilities, ifif forced
forced to
to pay
pay them
them immediately.
immediately. However,
However,
not
not all
all current
current liabilities
liabilities are
are to
to be
be paid
paid immediately.
immediately.
10-39
6.20 times
The
The ratio
ratio means
means that
that General
General Mills
Mills generates
generates $6.20
$6.20 of
of income
income
(before
(before the
the costs
costs of
of financing
financing and
and taxes)
taxes) for
for each
each dollar
dollar of
of
interest
interest expense.
expense. No
No doubt
doubt this
this ratio
ratio is
is part
part of
of the
the reason
reason that
that
General
General Mills
Mills has
has earned
earned aa favorable
favorable credit
credit rating
rating of
of BBB+.
BBB+.
10-40
Chapter 10
Supplement 10A
Straight-Line Method of
Amortization
Bond Premium
Bond premium
premium or
or discount
discount decreases
decreases each
each year,
year, until
until itit is
is completely
completely
Bond
eliminated on
on the
the bonds
bonds maturity
maturity date.
date. This
This process
process is
is called
called amortizing
amortizing
eliminated
the bond
bond premium
premium or
or discount.
discount. The
The straight-line
straight-line method
method of
of amortization
amortization
the
reduces the
the premium
premium or
or discount
discount by
by an
an equal
equal amount
amount each
each period.
period.
reduces
Recall
Recall our
our example
example when
when General
General Mills
Mills received
received $107,260
$107,260 on
on the
the issue
issue date
date
(January
(January 1,
1, 2010)
2010) but
but repays
repays only
only $100,000
$100,000 at
at maturity
maturity (December
(December 31,
31, 2013).
2013).
Under
Under the
the straight-line
straight-line method,
method, this
this $7,260
$7,260 is
is spread
spread evenly
evenly as
as aa reduction
reduction in
in
interest
interest expense
expense over
over the
the four
four years
years ($7,260
($7,260 44 == $1,815
$1,815 per
per year).
year).
1 Analyze
2 Record
10-42
Cash
$6,000
Cash Interest
Interest
$6,000
Amortization
Amortization of
of Premium
Premium (1,815)
(1,815)
Interest
$4,185
Interest Expense
Expense
$4,185
Bond Premium
Amortization Schedule of Bonds Issued at a Premium
$7,260
$7,260 -- $1,815
$1,815 == $5,445
$5,445
$7,260
$7,260 44 == $1,815
$1,815
$100,000
$100,000 6%
6% 12/12
12/12 == $6,000
$6,000
face
face value
value xx stated
stated int
int xx TT
$107,260
$107,260 $1,815
$1,815 == $105,445
$105,445
$6,000
$6,000 -- $1,815
$1,815 == $4,185
$4,185
Bond Discount
Recall
Recall our
our example
example where
where General
General Mills
Mills received
received $93,376
$93,376 for
for four-year
four-year
bonds
bonds with
with aa total
total face
face value
value of
of $100,000,
$100,000, implying
implying aa discount
discount of
of $6,624.
$6,624.
The
The annual
annual amortization
amortization of
of the
the discount
discount is
is $1,656
$1,656 ($6,624
($6,624 4).
4).
1 Analyze
2 Record
10-44
Cash
Cash Interest
Interest
Amortization
Amortization of
of Discount
Discount
Interest
Interest Expense
Expense
$6,000
$6,000
1,656
1,656
$7,656
$7,656
Bond Discount
Amortization Schedule of Bonds Issued at a Discount
$6,624
$6,624 44 == $1,656
$1,656
$100,000
$100,000 6%
6% 12/12
12/12 == $6,000
$6,000
Face
Face value
value xx stated
stated int
int xx TT
10-45
$6,624
$6,624 -- $1,656
$1,656 == $4,968
$4,968
$93,376
$93,376 ++ $1,656
$1,656 == $95,032
$95,032
$6,000
$6,000 ++ $1,656
$1,656 == $7,656
$7,656
Chapter 10
Supplement 10B
Effective-Interest Method of
Amortization
10-47
2 Record
10-48
Cash
$$ 6,000
Cash Interest
Interest
6,000
Effective
4,290
Effective Interest
Interest
4,290
Amortization
Amortization of
of Premium
Premium $1,710
$1,710
$7,290
$7,290 -- $1,710
$1,710 == $5,550
$5,550
$107,260
$107,260 4%
4% 12/12
12/12 == $4,290
$4,290
$100,000
$100,000 6%
6% 12/12
12/12 == $6,000
$6,000
Face
Face value
value xx stated
stated int
int xx time
time
$107,260
$107,260 -- $1,710
$1,710 == $105,550
$105,550
2 Record
10-50
Cash
$$ 6,000
Cash Interest
Interest
6,000
Effective
7,470
Effective Interest
Interest
7,470
Amortization
Amortization of
of Discount
Discount $$ 1,470
1,470
$7,470
$7,470 -- $1,470
$1,470 == $5,154
$5,154
$93,376
$93,376 8%
8% 12/12
12/12 == $7,470
$7,470
$100,000
$100,000 6%
6% 12/12
12/12 == $6,000
$6,000
Face
Face value
value xx stated
stated int
int xx time
time
$93,376
$93,376 ++ $1,470
$1,470 == $94,846
$94,846
Chapter 10
Solved Exercises
M10-5, E10-2, E10-3, E10-8, E10-10,
PA10-3
10-53
10-54
Adjusting entry for 2 months accrued interest ($6,000,000 x 7.5% x 2/12 = $75,000).
10-55
Required:
1.Considering both employee and employer payroll taxes, use the
preceding information to calculate the total labor cost for the company.
2.Prepare the journal entry to record the payroll for March, including
employee deductions (but excluding employer payroll taxes).
3.Prepare the journal entry to record the employers FICA taxes and
unemployment taxes.
10-56
10-57
18,045
16,445
1,600
10-58
Req. 2
12,000
12,000
Req. 3
10-59
Required:
1.Compute the quick ratio and times interest earned ratio (to two decimal
places) for 2008 and 2007.
2.Did Kraft appear to have increased or decreased its ability to pay current
liabilities and future interest obligations as they become due? How can you
explain the seemingly conflicting findings of your ratio analysis?
10-60
Req. 2
10-61
10-62
10-63
6,000
500
100
3,600
3,600
(b)
December 31, 2010:
dr Rent Revenue (-R, -SE)
cr Unearned Rent Revenue (+L)
1,200
1,200
Earned 20 days of rent but initially recorded as if all was earned. Need to
reduce revenue for 10 days unearned (10/30 x $3,600 = $1,200).
10-64
End of Chapter 10