Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Securitization wikipedia , lookup
Business valuation wikipedia , lookup
Financialization wikipedia , lookup
Global saving glut wikipedia , lookup
Lattice model (finance) wikipedia , lookup
History of pawnbroking wikipedia , lookup
Credit card interest wikipedia , lookup
Public finance wikipedia , lookup
Time value of money wikipedia , lookup
Continuous-repayment mortgage wikipedia , lookup
OBJECTIVES: •Contingent Liabilities •Present Value Concepts •Types of Long Term Liabilities •Notes Payable •Bonds Payable •Shareholders Equity ?? Commitments significant agreements that can affect the future operations of the company require disclosure in the notes to the financial statements but are not recorded in the financial statements until the agreement is executed (in whole or in part) For Example: A Note appearing in the financial statement. ‘The company has entered into agreements with certain wellknown celebrities to endorse the Company's products. The agreements, among other things, require the Company to make certain guaranteed payments in the future.’ Contingencies defined as something of uncertain occurrence an event has occurred which will result in a gain or loss in the future, but will not be known for sure until another event occurs or fails to occur in the future Accounting Rules for Contingencies gains: never anticipate the gain; only disclose the possible gain in the notes to the financial statements until the outcome is known losses: record the event (i.e., the liability & loss) if the loss outcome is likely and the amount of the loss can be reasonably estimated Present Value Concepts you are responsible for understanding the concept and its application to accounting but not the underlying methods of calculating present values The Concept: money received today can be invested to earn interest $10 invested today at 10% = $11 next year $11 next year is the same as $10 today the present value of $11 to be received next year = $10 the present value of $11 to be paid next year = $10 Present Value Concepts the present value (pv) of $11 to be paid next year = $10 Cash Payment B/S (liability) interest $1 $10 principal $11 record only the principal (pv) when the liability is incurred interest is incurred (and recorded) as time passes On January 1, Air Canada purchased parts from American Airlines by issuing a note payable of $12,000, due in two years. At 7% interest rates, the note is equivalent to $10,481 now. Required: Prepare the journal entries that are required during the first and second year. Note Payable Dr. Aircraft Parts $10,481 10,481 Cr. Note Payable $10,481 734 (to record the purchase of parts) 11,215 Dr. Interest Expense $734 785 Cr. Note Payable $734 12,000 (to record the interest on the note in year 1 = 7% x 10,481) Dr. Interest Expense $785 Cr. Note Payable $785 (to record the interest on the note in year 2 = 7% x 11,215) Notes Payable A note payable is is a written promise to pay a stated sum at one or more specified future dates. A note payable may require a singlesum repayment at the due date or maturity date or it may call for installment payments. If it requires regular payments in installments it is called an annuity. Notes payable require the payment of interest and the recording of interest expense. Interest expense is incurred on liabilities because of the time value of money. To calculate interest three important variables must be considered. (1) the principal; (2) the rate ; and (3) duration or time period Interest = Principal x Rate x Time Accounting for an Interest-Bearing Note The accounting entry to record $10,000 cash borrowed on a fiveyear 10% interest bearing note payable, with interest being payable at maturity would be: Dr. Cash Cr. Note Payable 10,000 10,000 Important Considerations – Interest Expense Interest is an expense of the period when the money is used, therefore it is measured, recorded and reported on a time basis rather than when the cash is actually paid. Accounting for a ‘Noninterest’-Bearing Note A no interest-bearing note includes the interest amount in the face value of the note. This causes a difference in the accounting entries. Assume in the previous example that the note was non-interest bearing, the accounting entries will be as follows: Dr. Cash Dr. Discount on note payable Cr. Note Payable 10,000 600 10,600 At the end of the first period, your accounting entries as it relates to interest will be as follows: Dr. Interest Expense Cr. Discount on note payable XX XX Future income taxes (a.k.a. deferred income taxes) 3 types of income taxes ... (i) income taxes withheld from employees' pay Dr. Wages & salaries expense Cr. Employee income tax payable Cr. Wages & salaries payable (ii) income taxes as calculated on the company's tax return Dr. Income tax expense Cr. Income taxes payable (CL) (iii) income taxes that will arise in the future but haven't yet become payable based on the company's tax return Future income taxes Future income taxes CCRA (Canada Customs & Revenue Agency) allows some reporting policies for tax purposes that aren't allowed by GAAP Tax Return Income Statement Sales Revenues Sales Revenues COGS COGS Operating Expenses Operating Expenses Amortization Expense Amortization Expense (CCA) Interest Expense Interest Expense Etc. Etc. GAAP Tax Rules Future income taxes CCRA (Canada Customs & Revenue Agency) allows some reporting policies for tax purposes that aren't allowed by GAAP for example, CCRA sometimes allows very high deductions for amortization on tax returns in the early years of a capital asset's life, but GAAP may not thus, taxes owed using "income tax policies" may differ from taxes based on "financial statement policies" these tax vs. accounting differences are called "temporary differences" (because eventually they will reverse) - report as "taxes payable" the amount of taxes owed according to the tax return (i.e., using "income tax policies") - report as "future income taxes" any liabilities (or assets) that are likely to arise in the future when the temporary differences reverse Long Term Liabilities - Bonds Bond Liabilities: What is a bond? a formal, legal debt agreement it sets-out how the borrower will repay the lender it’s like a long-term note payable, except that bonds can be owed to multiple entities (called bondholders) the bond describes the conditions of the debt agreement Some Terms maturity date (i.e., when it has to be repaid) amount to be repaid at maturity (i.e., face value) interest to be paid periodically until maturity (i.e.,bond interest rate / a.k.a. “coupon rate”) Finance Terms Related to Bonds amount to be repaid at maturity FACE VALUE interest to be paid periodically until maturity BOND RATE Finance Terms Related to Bonds 8% per year $1,000 FACE VALUE 8% per year 8% per year 8% per year 8% per year BOND RATE Finance Terms Related to Bonds Cash Received Cash Payment (Liability) Cash Payment Cash Payment Cash Payment Cash Cash Payment Payment Cash Payment interest ? bond price $40 $40 $40 $40 $40 $40 $1,000 face value bond price = p.v. of face value + p.v. of bond interest payments Finance Terms Related to Bonds Cash Received (liability) Cash Payment Cash Payment Cash Payment Cash Payment Cash Cash Payment Payment Cash Payment interest $40 $40 $40 $40 $40 $40 $1,000 $1,000 face bond value price bond price = p.v. of face value + p.v. of bond interest payments Bonds Issued At Par simply means that bond price = face value means bond interest rate (8%) = market rate (8%) in other words, interest paid by bond = interest demanded Accounting for Bonds Issued at Par interest ? bond $40 $40 $40 $40 $40 price $40 $1,000 face value record the bond liability at the p.v. of future payments Dr. Cash $1,000 Cr. Bond Payable $1,000 record interest expense = effective interest rate x liability Dr. Interest Expense $ 40 = 1000 x 8% x 6/12 Cr. Interest Payable $ 40 record the bond interest payment Dr. Interest Payable Cr. Cash $ 40 $ 40 Finance Terms Related to Bonds Cash Received (liability) Cash Payment Cash Payment Cash Payment Cash Payment Cash Cash Payment Payment Cash Payment interest $ 949 $40 $40 $40 $40 $40 $40 $1,000 face bond value price bond price = p.v. of face value + p.v. of bond interest payments Bonds Issued At a Discount discount means that bond price < face value means bond interest rate (8%) < market rate (10%) in other words, interest paid by bond < interest demanded Accounting for Bonds Issued at a Discount interest ? bond $40 $40 $40 $40 price $40 $40 $1,000 face value record the bond liability at the p.v. of future payments Dr. Cash (A) $ 949 Dr. Bond Discount (xL) $ 51 effective liability Cr. Bond Payable (L) $1,000 Balance Sheet Liabilities Bond Payable $1,000 Bond Discount (51) Effective Liab. $ 949 Accounting for Bonds Issued at a Discount interest ? bond price $40 $40 $40 $40 $40 $40 $1,000 face value record the bond liability at the p.v. of future payments Dr. Cash $ 949 Dr. Bond Discount $ 51 effective liability Cr. Bond Payable $1,000 record interest expense = market interest rate x liability Dr. Interest Expense $ 47.45 = (1000-51) x 10% x 6/12 $ 7.45 Cr. Bond Discount $ 40.00 Cr. Interest Payable record the bond interest payment Dr. Interest Payable $ 40 Cr. Cash $ 40 Balance Sheet Liabilities Income Statement Expenses at issue 6 months 6 months Bond Payable $1,000 $ 1,000 $1,000 Bond Discount (51) (43.55) (35.73) $ 949 956.45 964.27 Interest 6 months 6 months $ 47.45 $ 47.82 = 949 x 10% x 6/12 another 6 months later ... record interest expense = market interest rate x liability Dr. Interest Expense $ 47.82 = 10% x 6/12 x (1000-43.55) Cr. Bond Discount $ 7.82 Cr. Interest Payable $ 40.00 record the bond interest payment Dr. Interest Payable $ 40 Cr. Cash $ 40 Finance Terms Related to Bonds Cash Received (liability) Cash Payment Cash Payment Cash Payment Cash Payment Cash Cash Payment Payment Cash Payment interest $1,054 $40 $40 $40 $40 $40 $40 $1,000 face bond value price bond price = p.v. of face value + p.v. of bond interest payments Bonds Issued At a Premium premium means that bond price > face value means bond interest rate (8%) > market rate (6%) in other words, interest paid by bond > interest demanded Accounting for Bonds Issued at a Premium interest ? bond $40 $40 $40 $40 $40 $40 $1,000 face value price record the bond liability at the p.v. of future payments Dr. Cash $ 1,054 Cr. Bond Premium (L) $ 54 effective liability Cr. Bond Payable (L) $1,000 Balance Sheet Liabilities at issue Bond Payable $1,000 Bond Premium 54 $1,054 Accounting for Bonds Issued at a Premium interest ? bond price $40 $40 $40 $40 $40 $40 $1,000 face value record the bond liability at the p.v. of future payments Dr. Cash $ 1,054 Cr. Bond Premium $ 54 effective liability Cr. Bond Payable $1,000 record interest expense = effective interest rate x liability Dr. Interest Expense $ 31.62 = 6% x 6/12 x (1000+54) Dr. Bond Premium $ 8.38 Cr. Interest Payable $ 40.00 record the bond interest payment Dr. Interest Payable $ 40 Cr. Cash $ 40 Balance Sheet Liabilities Income Statement Expenses at issue 6 months 6 months Bond Payable $1,000 $ 1,000 $1,000 Premium 54 36.99 45.62 $ 1,054 1,045.62 1,036.99 Interest 6 months 6 months $ 31.62 $ 31.37 another 6 months later ... record interest expense = effective interest rate x liability Dr. Interest Expense $ 31.37 = 6% x 6/12 x (1000-45.62) Cr. Bond Premium $ 8.63 Cr. Interest Payable $ 40.00 record the bond interest payment Dr. Interest Payable $ 40 Cr. Cash $ 40 Early Retirement of Bonds remove the bonds payable (& any premium/discount) record the cash given up to retire the bonds record the gain/loss = amount by which liability >/< cash Assume the $1,000 bond issued at 105.4 (the previous example) is retired after only 1 year. The cash payment made to bondholders to retire the bond was $964. What’s the journal entry? Dr. Bond Payable $1,000 (given) Dr. Bond Premium $ 37 (as per acctg records) Cr. Cash $ 964 (assumed) Cr. Gain on Bond Retirement $ 73 (plug) Practice Rose Corporation sold 10-year, 8 percent bonds with a $100,000 par value on January 1, 2001. Interest is paid on June 30 and December 31. If the bonds were sold at 104 for a return of 7.42%, give the journal entries for 2001. Relevant facts: bonds were face value of bonds is $100,000 issued at a bonds were sold at 104 (i.e., $104,000) premium 8% is bond interest rate 7.42% is market discount rate Liability June Payment December June Payment Payment December Payment ... Final Cash Payments interest $104 bond price $4 $4 $4 $4 ... $4 $100 face value Rose Corporation sold 10-year, 8 percent bonds with a $100,000 par value on January 1, 2001. Interest is paid on June 30 and December 31. If the bonds were sold at 104 for a return of 7.42%, give the journal entries for 2001. Relevant facts: bonds were face value of bonds is $100,000 issued at a bonds were sold at 104 (i.e., $104,000) premium 8% is bond interest rate 7.42% is market discount rate Liability June Payment December June Payment Payment December Payment ... Final Cash Payments interest $104 bond price $4 $4 $4 $4 ... $4 $100 face value Accounting for Bonds Issued at a Premium record the bond liability at the p.v. of future payments Dr. Cash $ 104,000 Cr. Bond Premium $ 4,000 Cr. Bond Payable $100,000 record interest expense = effective interest rate x liability = 7.42% x 6/12 x (100+4) Dr. Interest Expense $ 3858 Dr. Bond Premium $ 142 Cr. Interest Payable $ 4000 record the bond interest payment Dr. Interest Payable $ 4000 Cr. Cash $ 4000 Accounting for Bonds Issued at a Premium record interest expense = effective interest rate x liability = 7.42% x 6/12 x (100,000+4,000-142) = 3,853 Dr. Interest Expense $ 3853 Dr. Bond Premium $ 147 Cr. Interest Payable $ 4000 record the bond interest payment Dr. Interest Payable Cr. Cash $ 4000 $ 4000 Ratios for Long-term Liabilities = debt/equity ratio Total Liabilities Total Liabilities + Shareholders' Equity shows the proportion of financing from debt suggests corporate financing strategy Ratios for Long-term Liabilities times interest earned ratio = Net Income + Tax Expense + Interest Interest shows whether sufficient income is generated to cover interest costs suggests the likelihood of interest payment Leases an agreement that allows one entity to obtain (from another entity) the use of assets two types of leases exist: 1) "OPERATING LEASES" these are simple rental agreements that allow one company the right to use another company's property in exchange for a rental payment the company providing the rented property is called the "lessor" and the company obtaining the use of the property is called the "lessee" Leases an agreement that allows one entity to obtain (from another entity) the use of assets two types of leases exist: 2) "CAPITAL LEASES" "rental" agreements whereby the lessor transfers substantially all of the risks & rewards of property ownership to the lessee in substance, this is just like the lessee going out and buying the property from the lessor with a long-term promissory note if a lease meets any one of three criteria, it is a capital lease (otherwise, it's an operating lease) Accounting for the 2 Types of Leases 1) "OPERATING LEASES" this is what we have been doing all along so far Lessee Dr. Rent Expense Cr. Rent Payable note that the lessee does not record the leased asset on the balance sheet Lessor Dr. Rent Receivable Cr. Rental Revenue Accounting for the 2 Types of Leases 1) "OPERATING LEASES" this is what we have been doing all along so far Lessee Lessor Dr. Rent Expense Dr. Rent Receivable Cr. Rent Payable Cr. Rental Revenue 2) "CAPITAL LEASES" because substantially all the risks and rewards of ownership pass from the lessor to the lessee, the lessee records a purchase & loan and the lessor records a sale Lessee Dr. Capital Asset under Lease $ (pv of lease pmts) Cr. Obligation under Capital Lease $ (pv of lease pmts) both an asset & liability appear on the balance sheet Accounting for the 2 Types of Leases 1) "OPERATING LEASES" this is what we have been doing all along so far Lessee Lessor Dr. Rent Receivable Dr. Rent Expense Cr. Rental Revenue Cr. Rent Payable 2) "CAPITAL LEASES" because substantially all the risks and rewards of ownership pass from the lessor to the lessee, the lessee records a purchase & the lessor records a sale Lessor don't worry about the journal entry details essentially, the lessor records a "lease sale" and related "cost of lease sales" Criteria for Identifying Capital Leases a guide for determining whether substantially all of the risks & rewards have been transferred IF... 1) ownership transfers sometime during the lease 2) the lease covers substantially all ( 75%) of the asset's life or 3) the lease payments are substantially all of the asset value ( pvmlp > 90% fmv ) IT'S A CAPITAL LEASE More on Accounting for Capital Leases Lessee Dr. Capital Asset under Lease records a capital asset Cr. Obligation under Capital Lease first capitalize ... then amortize (just like any other capital asset) usually use straight-line amortization method amortization period often = lease term More on Accounting for Capital Leases Lessee Dr. Capital Asset under Lease Cr. Obligation under Capital a long-term liability Lease lease payments include principal & interest (just like any other long-term debt payments) principal portion reduces the liability interest portion recorded as an expense Lessee’s Point of View Similar Asset? Liability? OPERATING LEASE make periodic pmts no asset appears on the balance sheet liability for lease payments only as they come due full payment shown as rent Expense? expense on I/S CAPITAL LEASE make periodic pmts capital asset appears with long-term assets on the balance sheet liability for present value of all lease payments before they come due interest portion of lease payment & amortization shown as expenses