Chapter 9 Liabilities 9 1 Account for Current and Contingent Liabilities Current Liabilities Two Types Known amounts Estimated amounts Known Amounts includes Accounts payable short term notes payable sales tax payable accrued liabilities payroll liabilities unearned revenues and current portion of long term debt Known Amounts Accounts payable Amounts owed for products or services purchased on account Accounts payable turnover COGS Average accounts payable Days payable outstanding 365 Accounts payable turnover Short term notes payable Due within one year Used to borrow cash or purchase asset Accrue interest Inventory Note payable short term Interest Expense Accounting for short term notes payable JE Purchase of note payable Purchases price x of note payable x months outstanding 12 To record payment of note payable Sales Tax Payable Note payable short term Interest payable Interest expense Purchase price x of note payable x months in use 12 Interest payable Cash Add all Levied on retail sales Collected from customers and remitted to state Accounting for Sales Tax Payable JE Accrued Liabilities Cash Add all Sales Sales tax payable Results from expenses incurred but not yet paid Categories Salaries and wages payable Interest payable Income taxes payable Payroll Major expense of most companies Many different forms Salary Wage Commission JE Payroll Liabilities Salary expense Employee income taxes payable FICA taxes payable Salaries payable Employee income tax payable FICA tax payable Salaries payable Unearned Revenue Business receives cash before earning revenue Results in a liability Cash Unearned revenue JE Received advance payment from customer To record earned portion of unearned revenue Current Portion of Long term Debt Unearned revenue Revenue Liability x Long term debt often paid in installments Amount of principal payable within one year Company reclassifies amount for long term Estimated Current Liabilities Estimated warranty payable Contingent liabilities Estimated Warranty Payable Matching principle Estimated warranty payable Warranty expense JE Estimate warranty liability for the period Inventory To replace defective parts under warranty Contingent Liabilities Estimated warranty payable Warranty expense is estimated in the year product is sold Potential liability that depends on future outcome of past events Accrue Loss probable Amount estimable Disclose Loss reasonably possible Long Term Liabilities Bonds Payable Debts of issuing company Bond certificate states Company name Principal Maturity date Interest rate Interest payment dates Types of bonds Term Serial Secured Unsecured Bonds prices Quoted as percent of maturity value Premium Price above face Credit balance Market price decreases towards maturity value Discount Price below face Debit balance Market price increases towards maturity value At maturity date Face value Market value Interest rates and Bond prices Bonds always sold at market price Bonds present value Two interest rates set bond price Stated interest rate coupon rate o Printed bond certificate o Determines cash interest paid to bondholders Market interest rate effective interest rate o Demanded by investors for loaning money o Stated 5rate usually differs from market rate Issue price of bonds payable on pg 530 Issuing bonds payable at par JE Cash Cash Cash Bonds payable Interest expense Cash Discount on bonds payable Bonds payable To issue bonds at par To pay semi annual interest Bonds payable To pay bonds at maturity Issuing bonds payable at discount To issue bonds at a discount BS Long term liabilities Bonds payable Less Discount on bonds payable Interest payment vs Interest expense Interest payment Face value x stated interest rate x Interest expense carrying amount x Market interest rate x Straight line method of discount amortization Amortization Discount or premium Number of interest payments Interest expense interest payment cash paid prem or disc Amortization JE To pays semiannual bond interest and amortize discount Partial Period Interest Payments JE Retiring bonds before maturity Discount on bonds payable Amortization Cash stated rate x par Discount on bonds payable Interest payable Discount on bonds payable Interest payable Interest expense Interest expense Interest expense Reasons to pay off bonds early Can relieve high interest payments Can borrow at a lower interest rate Callable feature Issuer can pay off bonds at a prearranged price Results in a gain or loss Convertible Bonds and Notes Bondholders can exchange bonds for stock Investors benefit from Guaranteed receipt of principal and interest on bonds Potential for gains on stock
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