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Reporting and InterpretingReporting and Interpreting

LiabilitiesLiabilitiesChapter 9

McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc.

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McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3

Liabilities Defined and Classified

Defined as probable debts or obligations of theentity that result from past transactions, which will

be paid with assets or services.

Defined as probable debts or obligations of theentity that result from past transactions, which will

be paid with assets or services.

Maturity = 1 year or less Maturity > 1 year

CurrentLiabilities NoncurrentLiabilities

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McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin Slide 4

Current Liabilities

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McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin Slide 5

Net Pay

MedicareTax

State andLocal Income

TaxesSocial

Security

Tax

FederalIncome Tax

VoluntaryDeductions

Gross Pay

Payroll Taxes

Less Deductions:

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McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin Slide 6

Notes Payable

A note payable specifies the interestrate associated with the borrowing.

To the lender, interest is a revenue.

To the borrower, interest is an expense..

A note payable specifies the interestrate associated with the borrowing.

To the lender, interest is a revenue.

To the borrower, interest is an expense..

Interest = Principal Interest Rate Time

When computing interest for oneWhen computing interest for one

year, Time equals 1. When theyear, Time equals 1. When the

computation period is less thancomputation period is less than

one year, then Time is a fraction.one year, then Time is a fraction.

When computing interest for oneWhen computing interest for one

year, Time equals 1. When theyear, Time equals 1. When the

computation period is less thancomputation period is less than

one year, then Time is a fraction.one year, then Time is a fraction.

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Estimated Liabilities

Contingent Liability Examples

LawsuitsEnvironmental

ProblemsProductWarranties

Probable Reasonably Possible Remote

Subject to estimate Record as liability Disclose in note Disclosure not required

Not subject to estimate Disclose in note Disclose in note Disclosure not required

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8/16McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin Slide 8

Lease Liabilities

Operating

Lease

Short-term lease; No

liability or asset

recorded

Capital

Lease

Long-term lease;

Meets one of 4

criteria; Results in

recording an asset

and a liability

Capital Lease Criteria1. Lease term is 75% or more of the assets expected economic life.2. Ownership of asset is transferred to lessee at end of lease.3. Lease permits lessee to purchase the asset at a price that is lower than its

fair market value.

4. The present value of the lease payments is 90% or more of the fair marketvalue of the asset when the lease is signed.

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Present Value Concepts

Money can grow over time, because itMoney can grow over time, because it

can earn interest.can earn interest.

$1,000invested

today at 10%.

In 5 years itwill be worth

$1,610.51.

In 25 years itwill be worth

$10,834.71!

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Present Value of a Single Amount

The present value of a single amount isthe worth to you today of receiving that

amount some time in the future.

Today

PresentValue

Future

FutureValue

Interest compounding periods

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How much do we need to invest today at10% interest, compounded annually, if we

need $1,331 in three years?

a. $1,000.00b. $ 990.00

c. $ 751.30

d. $ 970.00

How much do we need to invest today at10% interest, compounded annually, if we

need $1,331 in three years?

a. $1,000.00b. $ 990.00

c. $ 751.30

d. $ 970.00

Present Value of a Single Amount

The required future amount is $1,331.

i = 10% & n = 3 years

Using the present value of a singleamount table, the factor is .7513.

$1,331 .7513 = $1,000 (rounded)

The required future amount is $1,331.

i = 10% & n = 3 years

Using the present value of a singleamount table, the factor is .7513.

$1,331 .7513 = $1,000 (rounded)

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Present Values of an Annuity

An annuity is a series ofconsecutive equal periodic

payments.

Today

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What is the present value of receiving$1,000 each year for three years at an

interest rate of 10%, compounded annually?

a. $3,000.00b. $2,910.00

c. $2,700.00

d. $2,486.90

What is the present value of receiving$1,000 each year for three years at an

interest rate of 10%, compounded annually?

a. $3,000.00

b. $2,910.00

c. $2,700.00

d. $2,486.90

Present Values of an Annuity

The consecutive equal paymentamount is $1,000.

i = 10% & n = 3 years

Using the present value of anannuity table, the factor is 2.4869.

$1,000 2.4869 = $2,486.90

The consecutive equal paymentamount is $1,000.

i = 10% & n = 3 yearsUsing the present value of anannuity table, the factor is 2.4869.

$1,000 2.4869 = $2,486.90

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End of Chapter 9