L> chapter 10 - Financial accounting . College of san Mateo accountancy 121 Rosemary Nurre . Course details Announcements Assignments Student details house Page thing 10

Reporting and assessing Liabilities

Study missions define a current liability and identify the significant types of existing liabilities. Explain the accountancy for note payable. Explain the accountancy for other present liabilities. Recognize the species of bonds. Prepare the entries for the issuance of bonds and also interest expense. Explain the entries as soon as bonds are redeemed. Determine the requirements for the financial declare presentation and evaluation of liabilities. (Appendix 10A) use the straight-line method of amortizing shortcut discount and also bond premium. (Appendix 10B) apply the effective-interest an approach of amortizing bond discount and also bond premium. (Appendix 10C) explain the audit for permanent notes payable.

Study Ojective 1 - define a current Liability and Identify the significant Types of existing Liabilities

Liabilities are characterized as “creditors" insurance claims on complete assets” and also as “existing debts and obligations.” these claims, debts, and obligations have to be cleared up or paid at some time later on by the move of legacy or services. A current liability is a blame that deserve to reasonably be expected to be paid (1) indigenous existing present assets or through the development of other present liabilities, and (2) in ~ one year or the operation cycle, whichever is longer. fan that do not satisfy both of this criteria space classified as long-term liabilities. The different varieties of current liabilities encompass notes payable, thedesigningfairy.com payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest.

Do you have actually any an individual liabilities? space those liabilities current liabilities or permanent liabilities? Why is it necessary that you recognize whether castle are existing or long-term? If you were going to the financial institution to loaned money would it be necessary to the banker to recognize which that the liabilities to be current and also which to be long-term?

Study target 2 - explain the audit for notes Payable

obligations in the type of written notes are videotaped as notes payable.

You are watching: The carrying value of a long-term note payable is computed as:

Notes payable are frequently used rather of thedesigningfairy.com payable due to the fact that they provide the lender composed documentation of the obligation in case legal remedies are necessary to collection the debt. Usually call for the borrower to pay interest and also frequently room issued to meet short-term jae won needs. Are issued because that varying durations of time note due for payment in ~ one year the the balance sheet day are typically classified as existing liabilities.

A discussion of audit for irreversible installment notes payable is presented in attachment 10C in ~ the end of the chapter.

Study target 3 - define the accountancy for Other present Liabilities

Sales counting payable - Sales taxes room expressed together a portion of the sales price. The seller collects the sales taxes from the customer as soon as the revenue occurs and remits the tax accumulated to the state"s department of revenue periodically (usually monthly). Many states call for that the sales tax gathered be rung up separately on the cash register. (Gasoline sales room a significant exception.) once sales taxes are not rung up individually on the cash register, complete receipts are split by 100% plus the sales tax portion to determine sales.
Payroll and also payroll count payable - Every employer incurs liabilities relating come employees" salaries and also wages. One is the lot of wages and salaries fan to employees—wages and salaries payable. one more is the withholding taxes—federal and state income and FICA, compelled by regulation to be withheld from employees" pistol pay. until the withholding taxes are remitted to the government taxing authorities, lock are carried as current liabilities. Employers also incur a second type of payroll-related liability. through every payroll, the employer incurs miscellaneous payroll counting levied top top the employer. These payroll taxes incorporate the employer’s re-superstructure of Social protection (FICA) taxes and state and also federal unemployment taxes.
If you job-related 40 hours a week, making $10 every hour, is your take home pay because that the mainly $400? Why not? If the employer pays you $10 an hour for the 40 hours or $400 is this every one of the price the employer has relative to the student’s work-related week? Why not? Unearned revenues – carriers such together magazine publishers and airlines commonly receive cash before goods are delivered or solutions are rendered. The providers account for these unearned revenues as follows: once the development is received, both Cash and a current liability account identify the source of the unearned revenue space increased. Once the revenue is earned, the unearned revenue account is decreased (debited) and also an earned revenue account is increased (credited).
Current maturities of long-term debt - The current section of a irreversible debt have to be contained in current liabilities. present maturities of irreversible debt are commonly identified in the current liabilities portion of the balance sheet together long-term debt due in ~ one year. that is not necessary to prepare an advertisement justing entrance to recognize the existing maturity of long-term debt.

research Objective 4 - determine the types of binding

Long-term liabilities are responsibilities that are expected come be payment after one year and also are regularly in the form of binding or permanent notes.
Bonds are a form of interest-bearing notes payable approve by corporations, universities, and governmental agencies. Bonds, like typical stock, are offered in small denominations (usually $1,000 or multiples of $1,000). Secured bonds have details assets of the issuer pledged as collateral because that the bonds. Unsecured bonds are issued against the basic credit the the borrower. Convertible bonds have the right to be convert into usual stock in ~ the bondholder’s option. The conversion often gives bondholders an opportunity to advantage if the industry price that the usual stock boosts substantially. because that the issuer, the bonds offer at a greater price and also pay a reduced rate of attention than similar debt securities that perform not have actually a counter option. Callable binding room sub ject come retirement at a proclaimed dollar amount before maturity in ~ the choice of the issuer.

Bondholders are creditors conversely, stockholders room owners the a corporation.

Issuing procedures: A bond certificate is issued to the investor to carry out evidence the the investor’s claim against the company. The face value is the amount of primary due at the maturity date. The maturity date is the date that the last payment is as result of the shortcut holder native the company.
The contractual attention rate, regularly referred to as the stated rate, is the rate provided to determine the quantity of cash attention the borrower pays and the shortcut holder receives. The contractual interest rate is generally declared as an yearly rate and interest is generally paid semiannually.
Determining the market Value of bond The ax time value of money is offered to show the relationship in between time one money – the a dollar received today is worth much more than a disagreement promised at some time in the future. If who is walk to give you $1 million 20 years from now, you would want to uncover its tantamount today or the present value. The current sector value (present value) that a link is a role of 3 factors: The dollar quantities to be got in the future. Length of time until the quantities are received. The industry rate that interest. The market interest rate is the price investors demand for loaning accumulation to the corporation. The process of finding the present value is described as discounting the future amounts. research Objective 5 – Prepare the Entries because that the Issuance that Bonds and Interest cost
A corporation records bond transactions once it concerns or retires (buys back) bonds, and also when bondholders transform bonds into common stock. If a bondholder sells a link to an additional investor, the issuing firm receives no additional money top top the transaction, nor is the transaction journalized through the issuing corporation. Accounting because that Bond concerns - Bonds may be issued at challenge value, listed below face value (discount), or above face worth (premium). bond prices, because that both brand-new issues and existing bonds, room quoted together a percentage of the face value the the bond. Thus, a $1,000 bond through a quoted price that 97 sells in ~ a price of ($1,000 X 97%) $970. Issuing bond at challenge Value—To illustrate, assume that Devor Corporation authorize 100, 5-year, 10%, $1,000 bonds dated January 1, 2007, at 100 (100% of face value). Assume attention is payable yearly on January 1. The entry to document the revenue is:

Jan. 1 ............Cash ............100,000 .............................Bonds Payable............. 100,000 (To document sale of bonds at face value)

The bonds space reported in the permanent liability section of the balance sheet because the maturity date is an ext than one year away. The ad justing entrance to document the accrued interest on December 31 is:

Dec. 3l ........Bond attention Expense..... 10,000 .................................Bond attention Payable........... 10,000 (To accrue bond interest)

Bond interest payable is classified together a current liability due to the fact that it is scheduled for payment in ~ the next year.

The entrance to record the payment on January 1:

Jan. 1 ............Bond attention Payable........ 10,000 ................................Cash ..........................................10,000 (To record payment of shortcut interest)

Discount or Premium top top Bonds The contractual or declared interest rate is the rate used to the face (par) to arrive at the lot of attention paid in a year. The sector (effective) interest rate is the rate investors need for loaning accumulation to the corporation. Bonds offer at face or par worth only as soon as the contractual (stated) interest rate and the sector interest price are the same. However, the industry rates change daily. When the contractual and market interest rates differ, bonds sell listed below or over face value. Issuing Bonds at a Discount If the contractual interest price is less than the industry rate, bonds sell at a discount or at a price less than 100% of challenge value. Return Discount on binding Payable has a debit balance, it is not an asset; it is a contra account, i beg your pardon is deducted from bonds payable ~ above the balance sheet. To highlight bonds offered at a discount, assume that on January 1, 2007, Candlestick, Inc., sell $100,000, 5-year, 10% bonds at 98 (98% of challenge value) with interest payable top top January 1. The entrance to document the issuance is: Jan. 1 .............Cash ......................................98,000 .......................Discount on binding Payable..... 2,000 ...........................................Bonds Payable ....................100,000 (To record sale of bonds at a discount) The $98,000 represents the carrying amount of the bonds. The issuance the bonds listed below face value reasons the full cost of take out loan to differ from the bond attention paid. The difference in between the issuance price and the challenge value of the bonds—the discount—represents an additional price of borrowing and also should be tape-recorded as bond attention expense over the life that the bond. The complete cost of borrowing $98,000 because that Candlestick, Inc. Is $52,000 computed together follows:

Annual interest payments

($100,000 x 10% = $10,000; $10,000 x 5)..... = $50,000 Add: bond discount ($100,000 - $98,000) .....= ....2,000 Total price of borrowing ....................................$52,000

To follow the corresponding principle, shortcut discount is allocated to price in each duration in i beg your pardon the bonds space outstanding. This is referred to as amortizing the discount. Amortization of the discount increases the amount of interest cost reported every period. Together the discount is amortized, that balance will decrease and together a consequence, the carrying value of the bonds will increase, until at maturity the carrying value of the bonds equates to their challenge amount. Issuing Bonds at a Premium If the contractual interest rate is better than the industry rate, bonds market at a premium or at a price greater than 100% of challenge value. To highlight bonds offered at a premium, assume the Candlestick, Inc. Bonds described before are sold at 102 (102% of confront value) rather than 98. The entry to record the sale is:

Jan 1 .........Cash ....................102,000 .................................Bonds Payable ....................100,000 .................................Premium on bond Payable .....2,000 (To document sale the bonds in ~ a premium)

The premium on bonds payable is added come bonds payable ~ above the balance sheet, as presented below: ....................Long-term legal responsibility ................... Bond payable ..................................$100,000 Add: Premium on bonds payable................................ 2,000 ...............................................................................$102,000 The sale of bonds above face value reasons the complete cost of borrowings to it is in less 보다 the bond attention paid due to the fact that the borrower is not compelled to repay the bond premium at the maturity date of the bonds. Thus, the premium is taken into consideration to it is in a reduction in the price of borrowing the reduces shortcut interest expense over the life the the bonds. A link premium, prefer a link discount, is allocated to cost in each duration in which the bonds space outstanding. This is referred to as amortizing the premium. Amortization the the premium decreases the amount of interest expense reported every period. The is, the amount of interest expense reported in a period will be less than the contractual amount. Together the premium is amortized, the balance will decline and as a consequence, the moving value that the bonds will decrease, until at maturity the carrying value of the bonds amounts to their challenge amount. Bonds offered at a discount do not essential imply the bonds are inferior. Also, bonds the are offered at a premium carry out not necessary imply the bonds room superior to the bonds that are offered at a discount.

See more: All Of The Following Are Advantages Of Bond Financing Over Common Stock Except

Procedures for amortizing link premium and discount are debated in appendix 10A and also Appendix 10B at the end of this chapter.

examine Objective 6 - explain the Entries once Bonds space Redeemed

Bonds space retired once they are purchased (redeemed) by the issuing corporation. Redeeming Bonds in ~ Maturity nevertheless of the concern price of bonds, the publication value of the bonds in ~ maturity will certainly equal their challenge value. Assuming the the attention for the critical interest period is paid and also recorded separately, the interest to record the redemption the the chandelier bonds in ~ maturity is:

bond Payable ........................100,000 .............. Cash.......................................... 100,000 (To document redemption the bonds at maturity)

¨ Redeeming Bonds before Maturity A company may decide to retire bonds before maturity to reduce interest cost and remove debt from that is balance sheet. A agency should pensioner debt early on only if that has sufficient cash resources. As soon as bonds room retired before maturity, it is essential to: (1) get rid of the carrying value of the bonds at the redemption date, (2) document the cash paid, and also (3) identify the obtain or loss on redemption. The moving value is the confront value the the bonds much less unamortized shortcut discount or plus unamortized bond premium at the redemption date. assume at the end of the fourth duration Candlestick, inc., having actually sold that is bonds at a premium, retires that bonds at 103 after paying the yearly interest. The transferring value of the bonds at the redemption date is $100,400. The entry to document the redemption that Candlestick"s bonds at the end of the 4th interest period (January 1, 2011) is:

Jan. 1 bond Payable.................100,000 Premium on binding Payable............. 400 lose on shortcut Redemption............ 2,600 .............Cash .................................................103,000 (To record redemption the bonds in ~ 103)

The loss that $2,600 is the difference between the cash paid of $103,000 and also the transferring value, $100,400.

study Ob jective 7 - recognize the requirements for the Financial explain Presentation and analysis of legal responsibility

Balance paper Presentation current liabilities are the an initial category under liabilities on the balance sheet. Each of the principal types of current liabilities is listed separately within the category. within the present liabilities section, service providers usually perform notes payable first, followed by thedesigningfairy.com payable. Various other items climate follow in the order of their magnitude. The present maturities of permanent debt have to be report as current liabilities if they space to be paid from present assets. long-term liabilities room reported in a separate section of the balance sheet immediately following “Current Liabilities.” Disclosure of fan is an extremely important. An introduction data about debts may be gift in the balance paper with in-depth data (such as attention rates, maturity dates, conversion privileges, and also assets pledged together collateral) displayed in a supporting schedule in the notes. Statement the Cash operation Presentation Information concerning cash inflows and outflows that resulted from the principal part of debt transactions is noted in the “Financing activities” ar of the explain of cash flows. Interest price is reported in the “Operating activities” section, even though it result from blame transactions. Analysis mindful examination the debt responsibilities helps evaluate a company’s ability to pay its present obligations. It also helps to identify whether a firm can acquire long-term financing in order to grow. Liquidity ratios measure the short-term ability of a agency to salary its maturing obligations and to meet unexpected needs for cash. A typically used measure up of liquidity is the current ratio (presented in chapter 2), calculate as current assets separated by existing liabilities. In current years plenty of companies have intentionally decreased their liquid assets (such together cash, thedesigningfairy.com receivable, and also inventory) due to the fact that they price too much to hold. Providers that save fewer liquid assets on hand should rely on various other sources of liquidity. One such source is a bank heat of credit—a prearranged agreement between a company and a lender the permits the firm to borrow up to an agreed-upon amount. Solvency ratios measure up the ability of a agency to survive over a long duration of time.