Accounting Final Exam December 15 2010 Chapter 10 Current Liability a debt that a company expects to pay from existing current assets or the creation of new current liabilities within the nest year or operating cycle Ex Notes payable accounts payable unearned revenues accrued liabilities taxes salaries and wages interest payable Notes Payable obligations in the form of written promissory notes usually require the borrower to pay interest Journal for Signing a Note Payable Cash X Notes Payable X Journal to Accrue Interest Adjusting Entry X Interest Expense Interest Payable X Journal for Payment of Note and Interest Notes Payable Interest Payable X X Cash X Sales Taxes a percentage of sales the retailer collects from the customer and pays to the state not an expense is recorded as a liability until paid to the state Retailer serves only as a collection agent because it simply forwards the sales taxes paid by customers to the government If retailer does not ring up sales tax separately Total Sales Receipts 1 tax percentage Sales Total Sales Receipts Sales Sales Tax Journal to Record Sales and Sales Taxes Cash X Sales X Sales Taxes Payable X Wages and Salaries Payable the amount of wages and salaries owed to employees Withholding Taxes the amount required by law to be withheld from employees gross pay and paid to the government recorded as liability until paid to the government Journal for Payroll and Withholding Taxes Salaries and Wages Expense X Salaries and Wages Payable FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable Journal for Payment of Payroll Salaries and Wages Payable X Cash Journal for Employer s Payroll Taxes X Payroll Tax Expense X X X X X FICA Taxes Payable Federal Unemployment Taxes Payable X X State Unemployment Taxes Payable X Unearned Revenues revenues that are received before the company delivers goods or provided services Journal to Record Advance Payment Cash X Unearned Revenue X Journal to Record Revenue Earned Unearned Revenue X Revenue X Long term Debt Due Within One Year current maturities of long term debt this is a current liability Ex Mortgage this is a long term liability but a portion is paid off each month this portion is a current liability the portion paid off includes interest and part of the premium Balance Sheet Current liabilities are listed in order of magnitude Liquidity refers to the ability to pay maturing obligations and meet unexpected needs for cash current liabilities are sometimes listed in balance sheet by liquidity but not usually Working Capital the excess of current assets over current liabilities Current Assets Current Liabilities Working Capital Current Ratio permits us to compare the liquidity of different sized companies and of a single company at different times Current Assets Current Liabilities Current Ratio Long term Liabilities obligations that are expected to be paid after one year Bonds a form of interest bearing notes payable issued by corporations universities and governmental entities Advantages over common stock stockholder control is not affected bondholders do not have voting rights like stockholders do tax savings result bond interest is deductible for tax purposes earnings per share may be higher no additional share of common stock are issued Secured Bonds bonds that have specific assets of the issuer pledged as collateral Mortgage Bond a bond secured by real estate Sinking Fund Bond bonds secured by specific assets set aside to retire them Unsecured Debenture Bonds bonds issued against the general credit of the borrower Term Bonds bonds that mature at a single specified future date Serial Bonds bonds that mature in installments Registered Bonds bonds issued in the name of the owner interest payments are made by check to bondholder Bearer Coupon Bonds bonds that are not registered holders must send it coupons to receive interest payments Convertible Bonds bonds that can be converted into common stock at the bondholder s option Callable Bonds bonds that the issuing company can retire at a stated dollar amount prior to maturity Face Value Par Value the amount of principal the issuing company must pay at the maturity date Contractual Interest Rate Stated Rate the rate used to determine the amount of cash interest the borrower pays and the investor receives interest payments usually made semi annually Bond Indenture shows the terms of the bond and summarizes the rights of the bondholders and their trustees and the obligations of the issuing company Trustee financial institution that keeps records of each bondholder maintains custody of unissued bonds and holds conditional title to pledged property Bond Certificate a legal document that indicates the name of the issuer the face value of the bonds and such other data as the contractual interest rate and maturity date of the bonds Present Value the value of a bond at which it should sell in the marketplace Market Interest Rate the rate investors demand for loaning funds Journal for Issuing a Bond at 100 face value Cash X Bonds Payable CONTRACTUAL INTEREST RATE MARKET INTEREST RATE Journal for Payment of Interest No Previous Accrual Bond Interest Expense X Cash Journal to Accrue Interest Bond Interest Expense X Bond Interest Payable Journal to Pay off Accrued Interest Bond Interest Payable Cash X X X X X Discount contra liability if market rate is higher than contractual rate value of the bond falls below face value because investors will not be interested in receiving less interest than the market is offering as a result the company s interest rate increases to the market rate investors are paying less principal than 100 but borrower pays back less than 100 principle also Journal for Sale of Bonds at Discount Cash X Discount on Bonds Payable X Bonds Payable X Bonds Payable Discount Carrying Book Value Discount is subtracted from Bonds Payable on Balance Sheet Discount is an additional cost of borrowing because it is not received as a principal recorded as bond interest expense Total Interest Expenses Discount Additional Interest Expense Total Cost of Borrowing Premium adjunct liability if market rate is lower than the contractual rate the investor will pay more than face value for the bonds as a result the company will require more funds from the investor in order to reach market value investors are paying more principal than 100 but borrowers are paying back more than 100 principle also Journal for Sale of Bond at Premium Cash X Bonds Payable
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