Chapter 10: Reporting and Analyzing LiabilitiesChapter 10: Reporting and Analyzing LiabilitiesCurrent Liabilities:- Two key features: 1. Company expects to pay the debt from existing current assets or through the creation of other current liabilities. 2. Company will pay debt within one year or the operating cycle, whichever is longer. - Notes Payable:o Written promissory note.o Usually require the borrower to pay interest. o Those due within one year of the balance sheet date are usually classified as current liabilities. - Sales Tax Payable:o Sales taxes are expressed as a stated percentage of the sales price. o Selling company. Collects tax from the customer. Remits the collections to the state’s department of revenue. - Unearned Revenue: revenues that are received before the company delivers goods or provides service. 1. Company debits Cash, and credits a current liability account (Unearned Revenue).2. When the company earns the revenue, it debits the Unearned Revenue account, and credits a revenue account. - Current Maturities of Long-Term Debt:o Portion of long-term debt that comes due in the current year.o No adjusting entry required. - Payroll and Payroll Taxes Payable:o Salaries: managerial, administrative, and sales personnel (monthly or yearly rate). o Wages: store clerks, factory employees, and mutual laborers (rate per hour).o Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay. - Payroll tax expense results from three taxes that governmental agencieslevy on employers. These taxes are: FICA tax, Federal Unemployment tax, and State Unemployment tax.Bond: Long-Term Liabilities:- Bonds are a form of interest-bearing notes payable issued by corporations, universities, and governmental agencies. - Sold in small denominations (usually $1,000 or multiples of $1,000). - When a corporation issues bonds, it is borrowing money. The person who buys the bonds (the bondholder) is investing in bonds. 2- Types of Bonds:o Securedo Unsecuredo Convertibleo Callable- Issuing Procedures:o Bond Certificate: Issued to the investor. Provides name of the company issuing bonds, face value, maturity date, and contractual (stated) interest rate. o Face Value: principal due at the maturity.o Maturity Date: date final payment is due. o Contractual Interest Rate: rate to determine cash interest paid, generally semiannually. - Determining the Market Value of Bonds: the current market price (present value) of a bond is a function of three factors: 1. The dollar’s amount to be received. 2. The length of time until the amounts are received.3. The market rate of interest. - Issuing Bonds at Discount:o Sale of bonds below face value causes the total cost of borrowing to be more than the bond interest paid.3o The reason: Borrower is required to pay the bond discount at the maturity date. Thus, the bond discount is considered to be an increase in the cost of borrowing. o- Financial Statement Analysis and Presentation:o Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.oo Solvency ratios measure the ability of a company to survive over a long period of
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