Date post: | 15-Dec-2015 |
Category: |
Documents |
Upload: | derek-bovell |
View: | 214 times |
Download: | 0 times |
8 - 1©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Current and Long-Term
Liabilities
Chapter 8
8 - 2©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Learning Objective 1
Account for current liabilities
and contingent liabilities.
8 - 3©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Current Liabilities
Current liabilities are obligations due withinone year or within the company’s normal
operating cycle if it is longer than one year.
Known amount
Amount must be estimated
8 - 4©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Current Liabilities
Accounts payableShort-term notes payable
Sales tax payableCurrent portion of long-term debt
Accrued expensesPayroll liabilities
Unearned revenues
8 - 5©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Current Liabilities
Accounts payable are amounts owed to suppliersfor goods or services purchased on account.
Short-term notes payable are notespayable due within one year.
8 - 6©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Short-Term Notes Payable
In addition to recording the note payable,the business must also pay interest expense.
On January 30, a business purchased inventoryfor $8,000 by issuing a 1-year, 10% note payable.
The fiscal year ends on April 30.
8 - 7©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Short-Term Notes Payable
January 30Inventory 8,000
Notes Payable 8,000Purchase of inventory by issuing a one-year,10% note
How much interest was accrued as of April 30?
$8,000 × 10% × (3/12) = $200
8 - 8©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Short-Term Notes Payable
How is the payment at maturity recorded?
January 30Note Payable 8,000Interest Payable 200Interest Expense 600
Cash 8,800
$8,000 × 10% × (9/12) = $600
8 - 9©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Sales Tax Payable
Suppose one day’s sales at aHome Depot Store totaled $200,000.
Suppose one day’s sales at aHome Depot Store totaled $200,000.
How is the day’s sales recorded?How is the day’s sales recorded?
The business collected an additional5% in sales tax.
The business collected an additional5% in sales tax.
8 - 10©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Sales Tax Payable
Cash ($200,000 × 1.05) 210,000Sales Revenue 200,000Sales Tax Payable($200,000 × .05) 10,000
To record cash sales and the related sales tax
Cash ($200,000 × 1.05) 210,000Sales Revenue 200,000Sales Tax Payable($200,000 × .05) 10,000
To record cash sales and the related sales tax
8 - 11©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Current Installment ofLong-Term Debt
It is the amount of the principal thatis payable within one year.
At the end of the year, a company reclassifiesthe amount of its long-term debt that must
be paid during the upcoming year.
8 - 12©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Accrued Expenses
These are expenses that have been incurredbut not recorded.
These are expenses that have been incurredbut not recorded.
SalariesTaxes withheldInterestUtilities
SalariesTaxes withheldInterestUtilities
8 - 13©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Payroll Liabilities
Salary Expense 10,000Employee Income Tax Payable 1,200FICA Tax Payable 800Salary Payable 8,000
To record salary expense
8 - 14©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Unearned Revenues
The Dun & Bradstreet (D&B) Corporationprovides credit evaluation services to subscribers.
The Dun & Bradstreet (D&B) Corporationprovides credit evaluation services to subscribers.
What are the entries?What are the entries?
Assume that D&B charges a client$750 for a three-year subscription.Assume that D&B charges a client$750 for a three-year subscription.
8 - 15©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Unearned Revenues
January 1Cash 750
Unearned Revenue 750To receive cash for a three-year subscription
December 31Unearned Revenue 250
Subscription Revenue 250To record revenue earned at the end of the year
8 - 16©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Unearned Revenues
December 31,Balance Sheet Year 1 Year 2 Year 3
Current liabilities: Unearned subscription revenue $250 $250 $-0-Long-term liabilities: Unearned subscription revenue $250 $-0- $-0-
Income Statement Year 1 Year 2 Year 3
Revenues: Subscription revenue $250 $250 $250
8 - 17©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Current Liabilities ThatMust Be Estimated
Estimated Warranty Payable
Assume that Black & Decker made sales of$200,000,000 subject to product warranties.
What is the estimated warranty expense?
Black & Decker estimates that 3% of the productsit sells this year will require repair or replacement.
8 - 18©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Estimated Warranty Payable
$200,000,000 × .03 = $6,000,000$200,000,000 × .03 = $6,000,000
Warranty Expense 6,000,000Estimated Warranty Payable 6,000,000
To accrue warranty expense
Warranty Expense 6,000,000Estimated Warranty Payable 6,000,000
To accrue warranty expense
8 - 19©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Estimated Warranty Payable
Assume that defective merchandisetotals $5,800,000.
Estimated Warranty Payable 5,800,000Inventory 5,800,000
To replace defective products sold under warranty
Black & Decker will replace itand record the following:
8 - 20©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Contingent Liabilities
They are a potential liability that dependson a future event arising out of past events.
They are a potential liability that dependson a future event arising out of past events.
1. Record an actual liability if it is probable that the loss will occur and the amount can be reasonably estimated.
1. Record an actual liability if it is probable that the loss will occur and the amount can be reasonably estimated.
8 - 21©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Contingent Liabilities
2. Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur.
2. Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur.
3. There is no reason to report a contingent loss that is remote – unlikely to occur.3. There is no reason to report a contingent loss that is remote – unlikely to occur.
8 - 22©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Bonds: An Introduction
A bond is an interest bearinglong-term note payable.
A bond is an interest bearinglong-term note payable.
Bonds are groups of notes payable issuedto multiple lenders called bondholders.
Bonds are groups of notes payable issuedto multiple lenders called bondholders.
PrincipalPrincipal Interest rateInterest rate Payment datesPayment dates
8 - 23©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Types of Bonds
Term bonds
Serial bonds
Secured, ormortgage, bonds
Unsecured bonds(debentures)
8 - 24©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Bond Prices
Bond prices are quoted at apercent of their maturity value.
A quote of 101½ means that a $1,000bond sells for $1,000 × 1.015 = $1,015.
A $1,000 bond quoted at 883/8 is pricedat $1,000 × 0.88375 = $883.75.
8 - 25©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Bond Prices
A bond issued at a price above its face(par) value is issued at a premium.
A bond issued at a price belowface (par) value has a discount.
As a bond nears maturity, its marketprice moves toward par value.
8 - 26©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Present Value
The amount invested today receives a greateramount at a future date, which is called the
present value of a future amount.
the amount of the future receipt.
the length of time to the future receipt.
the interest rate for the period.
8 - 27©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Bond Interest Rates
Bonds are sold at market price, whichis the amount that investors are willing
to pay at any given time.
present value ofthe principal to be
received at maturity.
present value ofperiodic interest
payments.
8 - 28©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Bond Interest Rates
Contract rate(stated rate)
Market rate(effective rate)
8 - 29©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Learning Objective 2
Account for bonds
payable transactions.
8 - 30©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Issuing Bonds Payable at Par Value
On January 1, Chrysler Corporation issued$50,000,000 of 9%, 5-year bonds at par.
On January 1, Chrysler Corporation issued$50,000,000 of 9%, 5-year bonds at par.
January 1Cash 50,000,000
Bonds Payable 50,000,000To issue 9%, 5-year bonds at par
January 1Cash 50,000,000
Bonds Payable 50,000,000To issue 9%, 5-year bonds at par
8 - 31©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Issuing Bonds Payable at Par Value
What is the entry for the interest payment of July 1?What is the entry for the interest payment of July 1?
$50,000,000 × 9% × 6/12 = $2,250,000$50,000,000 × 9% × 6/12 = $2,250,000
July 1Interest Expense 2,250,000
Cash 2,250,000To pay semiannual interest
July 1Interest Expense 2,250,000
Cash 2,250,000To pay semiannual interest
8 - 32©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Issuing Bonds Payable at Par Value
What is the entry to accrue interest on December 31?What is the entry to accrue interest on December 31?
$50,000,000 × 9% × 6/12 = $2,250,000$50,000,000 × 9% × 6/12 = $2,250,000
December 1Interest Expense 2,250,000 Interest Payable 2,250,000To accrue interest
December 1Interest Expense 2,250,000 Interest Payable 2,250,000To accrue interest
8 - 33©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Chrysler issues $100,000 of its 9%, five-yearbonds when the market interest rate is 10%.
Cash 96,149Discount on Bonds Payable 3,851
Bonds Payable 100,000To issue 9%, 5-year bonds at a discount
Issuing Bonds Payableat a Discount
Chrysler receives $96,149 at issuance.
8 - 34©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Issuing Bonds Payableat a Discount
Chrysler’s balance sheet immediatelyafter issuance of the bonds:
Total current liabilities $ XXXLong-term liabilities:Bonds payable, 9%, due 2009 $100,000Discount on bonds payable – 3,851 $96,149
Discount on Bonds Payable is a contra accountto Bonds Payable, a decrease in liabilities.
8 - 35©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Learning Objective 3
Measure interest expense.
8 - 36©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Amortization Table on Bonds Issued at a Discount
1/1/047/1/041/1/057/1/05
1/1/09
$4,500 4,500 4,500
4,500
$4,807 4,823 4,839
4,961
$307 323 339
461
$3,851 3,544 3,221 2,882
-0-
$ 96,149 96,456 96,779 97,118
100,000
InterestDate
InterestPayment
InterestExpense
DiscountAmort.
DiscountAccountBalance
BondCarryingAmount
8 - 37©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Interest Expense on BondsIssued at a Discount
On July 1, 2004, Chrysler makes the first$4,500 semiannual interest payment and
also amortizes (decreases) the bond discount.July 1, 2004Interest Expense 4,807
Discount on Bonds Payable 307Cash 4,500
To pay semiannual interest and amortize bond discount
8 - 38©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Interest Expense on BondsIssued at a Discount
At December 31, 2004, Chrysler accruesinterest and amortizes the bond discount
for July through December.December 31, 2004Interest Expense 4,823
Discount on Bonds Payable 323Interest Payable 4,500
To accrue semiannual interest and amortize bond discount
8 - 39©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Interest Expense on BondsIssued at a Discount
Bonds Payable Discount on Bonds Payable
100,000 3,851 307 July 1323 Dec. 31
3,221
Bond carrying amount: $100,000 – $3,221 = $96,779
Chrysler’s bond accounts as of December 31, 2004.
8 - 40©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Chrysler Corporation issues $100,000of 9%, five-year bonds when the
market interest rate is 8%.
Cash 104,100Bonds Payable 100,000Premium on Bonds Payable 4,100
To issue 9% bonds at a premium
Issuing Bonds Payableat a Premium
Chrysler receives $104,100 at issuance.
8 - 41©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Issuing Bonds Payableat a Premium
Chrysler’s balance sheet immediatelyafter issuance of the bonds:
Total current liabilities $ XXXLong-term liabilities:Bonds payable $100,000Premium on bonds payable 4,100 $104,100
Premium on Bonds Payable is added to the Balanceof Bonds Payable to determine the carrying amount.
8 - 42©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Amortization Table on Bonds Issued at a Premium
1/1/047/1/041/1/057/1/05
1/1/09
$4,500 4,500 4,500
4,500
$4,164 4,151 4,137
3,955
$336 349 363
545
$4,100 3,764 3,415 3,052
-0-
$104,100 103,764 103,415 103,052
100,000
InterestDate
InterestPayment
InterestExpense
PremiumAmort.
PremiumAccountBalance
BondCarryingAmount
8 - 43©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Interest Expense on BondsIssued at a Premium
On July 1, 2004, Chrysler makes the first$4,500 semiannual interest payment and
also amortizes (decreases) the bond premium.July 1, 2004Interest Expense 4,164Premium on Bonds Payable 336
Cash 4,500To pay semiannual interest and amortize bond premium
8 - 44©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Straight-Line Amortization
This method amortizes the bond discountor premium by dividing it into equal
amounts for each interest period.
Chrysler would amortize the $4,100premium over 10 periods.
$4,100 ÷ 10 = $410 per period
8 - 45©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Early Retirement of Bonds Payable
Air Products and Chemicals, Inc., has $70 millionof debenture bonds outstanding with unamortizeddiscount of $350,000. The market price is 99¼.
Par value of bonds being retired $70,000,000Less: Unamortized discount – 350,000Carrying amount of the bonds $69,650,000Market price ($70,000,000 × 0.9925) 69,475,000Extraordinary gain on retirement $ 175,000
8 - 46©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Convertible Bonds and Notes
Texas Instruments has convertiblenotes payable of $250,000,000.
Notes Payable 125,000,000Common Stock 4,000,000Paid-in Capital 121,000,000
To record conversion of notes payable
Assume that noteholders convert half the notesinto 4 million shares, $1 par common stock.
8 - 47©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Learning Objective 4
Understand the advantages
and disadvantages
of borrowing.
8 - 48©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Financing OperationsWith Bonds or Stocks
Issuing Stock Issuing Notes or Bonds
Creates no liabilitiesor interest expense
Less risky to theissuing corporation
Does not dilute stockownership or control
of the corporation
Results in higher earningsper share because the earningson borrowed money usually
exceeds interest expense
8 - 49©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Financing OperationsWith Bonds or Stocks
Suppose a corporation needs $500,000 for expansion.
Plan 1 is to issue $500,000 of 10% bonds payable.
Plan 2 is to issue 50,000 shares of common stock for $500,000.
It has net income of $300,000 and 100,000 sharesof common stock outstanding.
Management is considering two financing plans:
8 - 50©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Financing OperationsWith Bonds or Stocks
Net income before expansion $300,000Project income before interest and taxes $200,000Less interest expense ($500,000 × 0.10) – 50,000Project income before income tax $150,000Less income tax expense (40%) – 60,000Expected project net income 90,000Total company net income $390,000Earnings per share after expansion: ($390,000/100,000 shares) $3.90
Plan 1: Borrow $500,000 at 10%
8 - 51©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Financing OperationsWith Bonds or Stocks
Net income before expansion $300,000Project income before interest and taxes $200,000Less interest expense 0Project income before income tax $200,000Less income tax expense (40%) – 80,000Expected project net income 120,000Total company net income $420,000Earnings per share after expansion: ($420,000/150,000 shares) $2.80
Plan 2: Issue 50,000 Shares of Common Stock for $500,000
8 - 52©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Long-Term Liabilities:Leases and Pensions
A lease is a rental agreement in whichthe tenant (lessee) agrees to make rent
payments to the property owner (lessor).
Operating
Capital
8 - 53©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Long-Term Liabilities:Leases and Pensions
It transfers title at the end of the term.
The present value of the lease payments is 90%or more of the market value of the leased asset.
It contains a bargain purchase option.
The lease terms cover 75% or more of theestimated useful life of the leased asset.
8 - 54©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Long-Term Liabilities:Leases and Pensions
Companies record pension and retirement benefitexpenses while employees work for the company.Companies record pension and retirement benefitexpenses while employees work for the company.
At the end of each period, the company comparesthe fair market value of the assets in the pension
plan – cash and investments – with the plan’saccumulated benefit obligation.
At the end of each period, the company comparesthe fair market value of the assets in the pension
plan – cash and investments – with the plan’saccumulated benefit obligation.
8 - 55©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Long-Term Liabilities:Leases and Pensions
If the accumulated benefit obligationexceeds plan assets, the plan is underfunded,
and the company must report the excessliability amount as a long-term pension
liability on the balance sheet.
If the accumulated benefit obligationexceeds plan assets, the plan is underfunded,
and the company must report the excessliability amount as a long-term pension
liability on the balance sheet.
8 - 56©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Learning Objective 5
Report liabilities on
the balance sheet.
8 - 57©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Reporting Liabilities
Accounts payable $1,976Accrued salaries and related expenses 627Sales tax payable 298Other accrued expenses 1,402Income taxes payable 78Current installments of long-term debt 4Total current liabilities $4,385Long-term debt 1,545Other long-term liabilities 451
Amounts in millions
8 - 58©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Reporting Fair Market Valueof Long-Term Debt
FASB Statement No. 107 requires companiesto report the fair market value of their financial
instruments, which includes long-term debt.
8 - 59©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
Reporting Financing Activities on the Statement of Cash Flows
Cash Flow from Financing Activities:Borrowing by using commercial paper $754Proceeds from long-term borrowings 32Payment of long-term debt (29)Proceeds from issuance of common stock 351Payments of cash dividends (371)Other, net (4)Net cash provided by financing activities $733
Amounts in millionsYear Ended
December 31
8 - 60©2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
End of Chapter 8