1、?The McGraw-Hill Companies,Inc.,1999Slide 10-1Irwin/McGraw-HillChapter 10Liabilities?The McGraw-Hill Companies,Inc.,1999Slide 10-2Irwin/McGraw-HillThe Nature of LiabilitiesI.O.U.Defined as debts or obligations arising from past transactions or events.Maturity=1 year or lessMaturity 1 yearCurrent Lia
2、bilitiesNoncurrent Liabilities?The McGraw-Hill Companies,Inc.,1999Slide 10-3Irwin/McGraw-HillDistinction Between Debt and EquityThe acquisition of assets is financed from two sources:Funds from creditors,with a definite due date,and sometimes bearing interest.Funds from ownersDEBTEQUITY?The McGraw-H
3、ill Companies,Inc.,1999Slide 10-4Irwin/McGraw-HillLiabilitiesQuestionDevon Mfg.borrows$100,000 from First Bank.The loan will be repaid in 20 years and has an annual interest rate of 8%.?The McGraw-Hill Companies,Inc.,1999Slide 10-5Irwin/McGraw-HillLiabilitiesQuestionThe obligation will not be paid w
4、ithin one year or one operating cycle,so it is a noncurrent liability.Devon Mfg.borrows$100,000 from First Bank.The loan will be repaid in 20 years and has an annual interest rate of 8%.?The McGraw-Hill Companies,Inc.,1999Slide 10-6Irwin/McGraw-HillEvaluating LiquidityCurrent Ratio=Current Assets?Cu
5、rrent LiabilitiesWorking Capital=Current Assets-Current LiabilitiesAn important indicator of a company抯抯 ability to meet its current obligations.Two commonly used measures:?The McGraw-Hill Companies,Inc.,1999Slide 10-7Irwin/McGraw-HillLiabilitiesQuestionDevon Mfg.has current liabilities of$230,000 a
6、nd current assets of$322,000.?The McGraw-Hill Companies,Inc.,1999Slide 10-8Irwin/McGraw-HillLiabilitiesQuestionCurre nt Ra tio=Curre nt Asse ts Curre nt Lia bilitie s=322,000$230,000$=1.4Devon Mfg.has current liabilities of$230,000 and current assets of$322,000.?The McGraw-Hill Companies,Inc.,1999Sl
7、ide 10-9Irwin/McGraw-HillAccounts PayableShort-term obligations to suppliers for purchases of merchandise and to others for goods and services.Merchandise Inventory invoicesShipping chargesUtility and phone billsOffice supplies invoices?The McGraw-Hill Companies,Inc.,1999Slide 10-10Irwin/McGraw-Hill
8、Notes PayableCurrent Notes PayableNoncurrent Notes PayableTotal Notes PayableWhen a company borrows money,a note payable is created.Current Portion of Notes PayableThe portion of a note payable that is due within one year,or one operating cycle,whichever is longer.?The McGraw-Hill Companies,Inc.,199
9、9Slide 10-11Irwin/McGraw-HillNotes PayablePROMISSORY NOTE Location Date after this date promises to pay to the order of the sum of with interest at the rateof per annum.signedtitleMiami,FlNov.1,1999Six monthsPorter CompanyJohn CaldwellJohn CaldwellSecurity National Bank$10,000.0012.0%treasurer?The M
10、cGraw-Hill Companies,Inc.,1999Slide 10-12Irwin/McGraw-HillNotes PayableOn November 1,1999,Porter Company would make the following entry.Da teDe scriptionDe bitCre dit1-N ovC ash10,000 N ote P ayable10,000?The McGraw-Hill Companies,Inc.,1999Slide 10-13Irwin/McGraw-HillInterest expense is the compensa
11、tion 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 revenue.To the borrower,interest is an expenseInterest Rate Up!Interest Payable?The McGraw-Hill Companies,Inc.,1999Slide 10-14Irwin/McGraw-HillThe interest form
12、ula includes three variables that must be considered when computing interest:When computing interest for one year,time?equals 1.When the computation period is less than one year,then time?is a fraction.Interest PayableFor example,if we needed to compute interest for 3 months,time?would be 3/12.?The
13、McGraw-Hill Companies,Inc.,1999Slide 10-15Irwin/McGraw-HillWhat entry would Porter Company make on December 31,the fiscal year-end?Interest PayableExampleDa teDe scriptionDe bitCre dit?The McGraw-Hill Companies,Inc.,1999Slide 10-16Irwin/McGraw-HillInterest PayableExampleOn December 31,Porter Company
14、 would record interest payable with the following entry:$10,00012%2/12=$200Da teDe scriptionDe bitCre dit31-Dec Interest Expense200 Interest Payable200?The McGraw-Hill Companies,Inc.,1999Slide 10-17Irwin/McGraw-HillPayroll Liabilities Employers incur several expenses and liabilities from having empl
15、oyees.?The McGraw-Hill Companies,Inc.,1999Slide 10-18Irwin/McGraw-HillFICA TaxesMedicare TaxesFederal Income TaxState and Local Income TaxesVoluntary DeductionsNet PayGross PayPayroll Liabilities?The McGraw-Hill Companies,Inc.,1999Slide 10-19Irwin/McGraw-HillDeferred revenue is recorded.Deferred rev
16、enue is a liability account.Cash is received in advance.Cash is sometimes collected from the customer before the revenue is actually earned.Unearned Revenue?The McGraw-Hill Companies,Inc.,1999Slide 10-20Irwin/McGraw-HillEarned revenue is recorded.As the earnings process is completed.Deferred revenue
17、 is recorded.Cash is received in advance.Unearned RevenueCash is sometimes collected from the customer before the revenue is actually earned.?The McGraw-Hill Companies,Inc.,1999Slide 10-21Irwin/McGraw-HillRelatively small debt needs can be filled from single sources.BanksInsurance CompaniesPension P
18、lansLong-Term Debt?The McGraw-Hill Companies,Inc.,1999Slide 10-22Irwin/McGraw-HillLarge debt needs are often filled by issuing bonds.Long-Term Debt?The McGraw-Hill Companies,Inc.,1999Slide 10-23Irwin/McGraw-HillInstallment Notes PayableLong-term notes that call for a series of installment payments.E
19、ach payment covers interest for the period AND a portion of the principal.With each payment,the interest portion gets smaller and the principal portion gets larger.?The McGraw-Hill Companies,Inc.,1999Slide 10-24Irwin/McGraw-HillAllocating Installment Payments Between Interest and PrincipalIdentify t
20、he unpaid principal balance.Unpaid Principal?Interest rate=Interest expense.Installment payment-Interest expense=Reduction in unpaid principal balance.Compute new unpaid principal balance.?The McGraw-Hill Companies,Inc.,1999Slide 10-25Irwin/McGraw-HillAllocating Installment Payments Between Interest
21、 and PrincipalOn January 1,1999,Rocket Corp.borrowed$7,851.57 from First Bank of River City.The loan was a five-year loan and had an interest rate of 10%.The annual payment is$2,000.Prepare an amortization table for Rocket Corp.s loan.?The McGraw-Hill Companies,Inc.,1999Slide 10-26Irwin/McGraw-HillA
22、llocating Installment Payments Between Interest and PrincipalDatePaymentInterest ExpenseReduction in Unpaid BalanceUnpaid BalanceJan.1,19997,581.57$Jan.1,20002,000.00$758.16$1,241.84$6,339.73 Jan.1,20012,000.00 633.97 1,366.03 4,973.70 Jan.1,20022,000.00 497.37 1,502.63 3,471.07 Jan.1,20032,000.00 3
23、47.11 1,652.89 1,818.18 Jan.1,20042,000.00 181.82 1,818.18 (0.00)Now,prepare the entry for the first payment on January 1,2000.?The McGraw-Hill Companies,Inc.,1999Slide 10-27Irwin/McGraw-HillAllocating Installment Payments Between Interest and PrincipalThe information needed for the journal entry ca
24、n be found on the amortization table.The payment amount,the interest expense,and the amount to credit to principal are all on the table.Da teDe scriptionDe bitCre dit31-Dec Interest Expense758.16 Note Payable1,241.84 Cash2,000.00?The McGraw-Hill Companies,Inc.,1999Slide 10-28Irwin/McGraw-HillBonds P
25、ayableBonds usually involve the borrowing of a large sum of money,called principal.The principal is usually paid back as a lump sum at the end of the bond period.Individual bonds are often denominated with a par value,or face value,of$1,000.?The McGraw-Hill Companies,Inc.,1999Slide 10-29Irwin/McGraw
26、-HillBonds PayableBonds usually carry a stated rate of interest,also called a contract rate.Interest is normally paid semiannually.Interest is computed as:?The McGraw-Hill Companies,Inc.,1999Slide 10-30Irwin/McGraw-HillBonds PayableBonds are issued through an intermediary called an underwriter.Bonds
27、 can be sold on organized securities exchanges.Bond prices are usually quoted as a percentage of the face amount.lFor example,a$1,000 bond priced at 102 would sell for$1,020.?The McGraw-Hill Companies,Inc.,1999Slide 10-31Irwin/McGraw-HillTypes of BondsMortgage BondsConvertible BondsJunk BondsDebentu
28、re Bonds?The McGraw-Hill Companies,Inc.,1999Slide 10-32Irwin/McGraw-HillAccounting for Bonds PayableOn January 1,2000,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
29、the bonds.Da teDe scriptionDe bitCre dit?The McGraw-Hill Companies,Inc.,1999Slide 10-33Irwin/McGraw-HillAccounting for Bonds PayableOn January 1,2000,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 fa
30、ce value.Record the issuance of the bonds.Da teDe scriptionDe bitCre dit1-JanCash1,500,000 Bonds Payable1,500,000?The McGraw-Hill Companies,Inc.,1999Slide 10-34Irwin/McGraw-HillAccounting for Bonds PayableRecord the interest payment on July 1,2000.Da teDe scriptionDe bitCre dit?The McGraw-Hill Compa
31、nies,Inc.,1999Slide 10-35Irwin/McGraw-HillAccounting for Bonds PayableRecord the interest payment on July 1,2000.Da teDe scriptionDe bitCre dit1-JulInterest Expense90,000 Cash90,000?The McGraw-Hill Companies,Inc.,1999Slide 10-36Irwin/McGraw-HillBonds Sold Between Interest DatesBonds are often sold b
32、etween interest dates.The selling price of the bond is computed as:Present value of the bond+Accrued interest since the last interest payment=Selling price of the bond?The McGraw-Hill Companies,Inc.,1999Slide 10-37Irwin/McGraw-HillLets look at the present value concept!Hold on tight!?The McGraw-Hill
33、 Companies,Inc.,1999Slide 10-38Irwin/McGraw-HillThe Concept of Present Value$1,000 invested today at 10%.Money can grow over time,because it can earn interest.?The McGraw-Hill Companies,Inc.,1999Slide 10-39Irwin/McGraw-Hill$1,000 invested today at 10%.In 5 years it will be worth$1,610.51.In 25 years
34、 it will be worth$10,834.71!Present ValueFuture ValueThe Concept of Present Value?The McGraw-Hill Companies,Inc.,1999Slide 10-40Irwin/McGraw-HillHow much is a future amount worth today?TodayPresent ValueFutureValueInterest compounding periodsThe Concept of Present Value?The McGraw-Hill Companies,Inc
35、.,1999Slide 10-41Irwin/McGraw-HillHow much is a future amount worth today?Three pieces of information must be known to solve a present value problem:lThe future amount.lThe interest rate(i).lThe number of periods(n)the amount will be invested.The Concept of Present Value?The McGraw-Hill Companies,In
36、c.,1999Slide 10-42Irwin/McGraw-HillTwo types of cash flows are involved with bonds:TodayPrincipal payment at maturity.Periodic interest payments called annuities.MaturityThe Concept of Present Value?The McGraw-Hill Companies,Inc.,1999Slide 10-43Irwin/McGraw-HillThe Present Value Concept and Bond Pri
37、cesPresent Value of the Principal (a single payment)+Present Value of the Interest Payments(an annuity)=Selling Price of the B ond The selling price of the bond is determined by the market based on the time value of money.?The McGraw-Hill Companies,Inc.,1999Slide 10-44Irwin/McGraw-HillThe Present Va
38、lue Concept and Bond Prices The selling price of the bond is determined by the market based on the time value of money.InterestBondAccounting forRatesPricethe DifferenceStatedMarket BondPar ValueThere is no differenceRateRatePriceof the Bondto account for.StatedMarket BondPar ValueThe difference is
39、accountedRateRatePriceof the Bondfor as a bond discount.StatedMarket BondPar ValueThe difference is accountedRateRatePriceof the Bondfor as a bond premium.=75%of the economiclife of the property.The PV of the minimumlease payments=90%ofthe FMV of the property.A lease must be recorded asa Capital Lea
40、se if it meetsany of the following criteria.?The McGraw-Hill Companies,Inc.,1999Slide 10-48Irwin/McGraw-HillPensionsEmployers offer pension plans to employees.Retirees receive pension payments from the pension fund.The employer makes payments to a pension fund.Usually,this is an independent entity m
41、anaged by a professional fund manager.?The McGraw-Hill Companies,Inc.,1999Slide 10-49Irwin/McGraw-HillPensionsActuaries make the pension expense computations,based on:Avg.age,retirement age,life expectancy.Employee turnover rates.Compensation levels.Expected rate of return for the fund.The accountan
42、t then posts the entry to record pension expense and pension liability.?The McGraw-Hill Companies,Inc.,1999Slide 10-50Irwin/McGraw-HillOther Postretirement BenefitsMany companies offer benefits to retirees other than pensions,such as health coverage or fitness club memberships.DateDescriptionDebitCr
43、editNonpension PostretirementBenefits Expense$Cash$Unfunded Liability for Nonpension Postretirement Benefits$The unfunded liability must be disclosed on the employer抯抯 balance sheet.?The McGraw-Hill Companies,Inc.,1999Slide 10-51Irwin/McGraw-HillDeferred Income Taxes Corporations pay income taxes qu
44、arterly.?The McGraw-Hill Companies,Inc.,1999Slide 10-52Irwin/McGraw-HillThe difference between tax expense and tax payable is recorded in an account called deferred taxes.The Internal Revenue Code is the set of rules for preparing tax returns.Financial statement income tax expense.IRS income taxes p
45、ayable.GAAP is the set of rules for preparing financial statements.Results in.Results in.Usually.Deferred Income Taxes?The McGraw-Hill Companies,Inc.,1999Slide 10-53Irwin/McGraw-HillExamine the December 31,1998 information for X-Off Inc.X-Off uses straight-line depreciation for financial reporting a
46、nd accelerated depreciation for income tax reporting.X-Offs tax rate is 30%.R even u es1,000,000$D ep reciatio n E xp en se:S traig h t-lin e200,000 Accelerated320,000 Oth er E xp en ses650,000 Deferred Income TaxesExample?The McGraw-Hill Companies,Inc.,1999Slide 10-54Irwin/McGraw-HillIncomeTaxState
47、mentReturnDifferenceRevenues1,000,000$Less:Depreciation200,000 Other expenses650,000 Income before taxes150,000$Tax rate30%Income taxes45,000$The income tax amount computed based on financial statement income is income tax expense for the period.Deferred Income TaxesExampleCompute X-Off抯抯 income tax
48、 expense and income tax payable.?The McGraw-Hill Companies,Inc.,1999Slide 10-55Irwin/McGraw-HillCompute X-Offs income tax expense and income tax payable.IncomeTaxStatementReturnDifferenceRevenues1,000,000$1,000,000$Less:Depreciation200,000 320,000 Other expenses650,000 650,000 Income before taxes150
49、,000$30,000$Tax rate30%30%Income taxes45,000$9,000$Income taxes based on tax return income are the taxes payable for the period.Deferred Income TaxesExample?The McGraw-Hill Companies,Inc.,1999Slide 10-56Irwin/McGraw-HillIncomeTaxStatementReturnDifferenceRevenues1,000,000$1,000,000$-$Less:Depreciatio
50、n200,000 320,000 (120,000)Other expenses650,000 650,000 -Income before taxes150,000$30,000$120,000$Tax rate30%30%30%Income taxes45,000$9,000$36,000$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.Deferred Income TaxesEx
