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Transcript
Accounting for Liabilities Chapter 07 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 7-2 Learning Objectives 1. Show how notes payable and related interest expense affect financial statements. 2. Show how sales tax liabilities affect financial statements. 3. Define contingent liabilities and explain how they are reported in financial statements. 4. Explain how warranty obligations affect financial statements. 5. Show how installment notes affect financial statements. 6. Show how a line of credit affects financial statements. 7. Explain how to account for bonds issued at face value and their related interest costs. 8. Use the straight-line method to amortize bond discounts and premiums. 9. Distinguish between current and noncurrent assets and liabilities. 10. Prepare a classified balance sheet. 11. Use the effective interest rate method to amortize bond discounts and premiums (Appendix). 7-3 Reporting Contingent Liabilities 7-4 Installment Notes Payable Long-term installment notes are liabilities that usually have terms from two to five years. Principal Payments Company Each payment covers interest for the period and a portion of the principal. Lender As payments are made, the amount allocated to interest gets smaller and to principal gets larger. 7-5 Installment Notes Payable Annual payments are constant. $30,000 $25,000 $20,000 Interest Principal $15,000 $10,000 $5,000 $Year 1 Year 2 Year 3 Year 4 Year 5 With each payment the amount applied to the principal increases and the amount applied to interest decreases. 7-6 Line of Credit Lines of credit are pre-approved financing plans that allow companies to borrow and repay funds as needed up to the maximum credit line set by the creditor. Lines of credit are normally used for relatively shortterm borrowing to finance seasonal business needs. 7-7 Bonds Issued at Face Value Mason Company issues bonds on January 1, 2012. 2011. Principal = $100,000 Stated Interest Rate = 9% Interest Date = 12/31 Maturity Date = Dec. 31, 2016 2015 (5 years) Bond Selling Price Mason Company Bond Certificate at Face Value Investors 7-8 Bonds Issued at Face Value On each yearly interest payment date, Mason Company will pay $9,000 in interest. The amount is computed as follows: $100, 000 × 9% = $9,000 Bond Interest Payments Mason Company Investors 7-9 Bonds Issued at Face Value On December 31, 2016, Mason Company will return the $100,000 principal amount to the investors. Bond Principal at Maturity Date Mason Company Investors 7-10 Bonds Issued at a Discount Mason issues bonds on January 1, 2012.1, 2011. MasonCompany Company issues bonds on January Principal Principal= =$100,000 $100,000 Issued at 95 instead of face; cash proceeds of $95,000 Stated Interest Rate = 9% Stated Interest Rate = 9% Interest Date = 12/31 Interest Date = 12/31 Maturity Date = Dec. (5 years) Maturity Date = Dec. 31, 31, 20162015 (5 years) Bond Selling Price Mason Company Bond Certificate at Face Value Investors 7-11 Bonds Issued at a Discount $100,000 Mason Company face issued issues at 95: bonds on January 1, 2011. Principal = $100,000 Bonds Payable $100,000 Stated InterestonRate = 9% Less: Discount Bonds Payable (5,000) Interest Date = 12/31 Carrying Value $ 95,000 Maturity Date = Dec. 31, 2015 (5 years) Bond Selling Price Mason Company Bond Certificate at Face Value Investors 7-12 Bonds Issued at a Discount Expense Recognition for Bond issued at 95 Mason’s cash payment is $9,000 ($100,000 x 0.09) Amortization of the discount of $5,000 over 5 years is $1,000 per year. Interest expense recognized is $9,000 plus $1,000 = $10,000 Cash = (9,000) = Carrying Value of Bond Liability 1,000 + + Ret. Earn. (10,000) Revenue n/a - Expenses 10,000 = = Net Income (10,000) Cash Flow (9,000) OA 7-13 Current Versus Noncurrent Current assets are expected to be converted to cash or consumed within one year or an operating cycle, whichever is longer. Current assets include: •Cash •Marketable Securities •Accounts Receivable •Short-Term Notes Receivable •Interest Receivable •Inventory •Supplies •Prepaid Items 7-14 Current Versus Noncurrent Current liabilities are due within one year or an operating cycle, whichever is longer. Current liabilities, also called short-term liabilities, include: •Accounts Payable •Short-Term Notes Payable •Wages Payable •Taxes Payable •Interest Payable 7-15 End of Chapter Seven