Current liabilities Debt lengths and naming Chapter 10 o Creditor is the lender and the debtor is the borrower o Long term liabilities debts due beyond one year o Current liabilities debts that will be paid within one year Three types of liabilities o Accounts payable for most companies largest current liability o Long term liabilities installments paid in periodic payments o Short term notes payable issued to purchase merchandise or assets Discounted notes are sometimes issued rather than interest bearing notes o Interest rate is called discount rate discount rate x face amount o Borrower receives face amount less discount which is called proceeds o Borrower repays the face amount of the note on due date Issuing note for overdue account payable Payment of mature note Issuance of a discount note Payment of discounted note Account payable Notes payable Notes payable Interest expense Cash Cash Interest expense Notes payable Notes payable Cash 1 000 1 000 1 000 30 1 030 19 250 750 20 000 20 000 20 000 Payroll and payroll taxes Regular pay overtime pay gross pay gross pay deductions net pay o Federal income taxes also known as federal withholding tax W 4 o FICA tax which contributes to social security 6 and Medicare 1 5 o Employees may also deduct for retirement charity insurance or unions Employers payroll taxes o Employers must match the employees FICA tax contribution o Fed unemployment consumption tax FUTA provides for unemployed o Similar to SUTA tax which is same thing on a state level Wage and tax statement W 2 is provided annually to each employee Payroll for salaries Salaries expense 15 000 Social security tax payable Medicare tax payable Federal income tax payable Salaries payable Social security tax payable Medicare tax payable SUTA tax payable FUTA tax payable 900 225 2 925 10 950 900 300 200 100 Payroll for taxes Payroll tax expense 1 500 Employee fringe benefits Vacation pay o Accumulated vacation used in the future is a long term liability o Vacation for mandatory use in a year is current liability Pension expenses o Defined benefit plan employer pays pension based on formula o Defined contribution plan company invests employee contributions o 401k is an example company matches a part of your contributions Other benefits such as dental eye and medical care insurance tuition etc are treated similarly to benefit pension expenses Vacation pay Vacation pay expense Vacation pay payable 325 000 325 000 Defined contribution plan Pension expense Cash 50 000 50 000 Defined benefit plan Pension expense Cash Unfunded pension liability 80 000 60 000 20 000 Contingent liabilities Probable and not estimable polluting a local river and having to clean it and fines Estimated product warranty expense Reasonably possible patent infringement that has been taken to court Product warrant expense 3 000 Product warranty payable 3 000 Repaired defective product under warranty Product warranty payable 200 Supplies 200 Financial analysis Current position analysis is based on following three measures o Working capital current assets current liabilities o Current ratio current assets current liabilities o Quick ratio quick assets current liabilities Stockholders elect a board of directors the board selects a CEO and other officers Chapter 11 Corporations Benefits of a corporation o Exists separately from its owners o Corporation exists indefinitely o Suited to raise large amounts of money o Ownership easily transferable o Limited liability Disadvantages of a corporation o Board more close to management than stockholders o Net income taxed at corporation level and individual level o Corporations must satisfy many requirements Sarbanes Oxley Corporation organizing costs Organizational expenses 8 500 Cash 8 500 Issuing stock Total authorized stocks stated in charter issued is what stockholders own outstanding is all the stock that is leftover Major rights that accompany ownership of stock o Right to vote in corporation matters o Right to share in distribution of earnings o Right to share assets upon liquidation Common stock has equal rights preferred stocks which have first rights to dividends Cumulative preferred stock has right to receive dividends undeclared in previous years Price at which a stock is sold depends on o Financial condition earnings record and dividend record of company o Investor expectations of potential earning power o General business and economic conditions and expectations Stock sold at price above par means its sold at a premium Stock sold at price below par means its sold at discount Issuing stock Cash 1 500 000 Preferred stock Common stock 500 000 100 00 Issuing stock at a premium Cash 110 000 Preferred stock Paid in capital in excess of par 100 000 10 000 Issuing no par stock Cash Common stock 400 000 400 000 Dividends Conditions for a cash dividend o Sufficient retained earnings o Sufficient cash o Formal action by board of directors Three dates included in a dividend announcement o Date of declaration board authorizes payment o Date of record date which stockholders receive dividends is determined o Date of payment date corporation pays dividends Stock dividends is distribution of shares of stock to stockholders o Only affects stockholders equity but doesn t not affect ALE o Amount of stock dividend transferred from retained earnings to paid in capital o Does not change individual stockholders proportionate equity in company Cash dividend date of declaration Cash dividends 42 500 Cash dividends payable 42 500 Cash dividend date of payment Cash dividends payable 42 500 Cash 42 500 Stock dividend date of declaration Stock dividends 3 100 000 stock dividends x market price Stock dividends distributable Paid in capital in excess of par 2 000 000 stock dividend x par price 1 000 000 difference Stock dividend date of issuance Stock dividends distributable 2 000 000 Common stock 2 000 000 Treasury stock Treasury is stock that a corporation has issued then reacquired cost method o To provide for resale to employees o To reissue as bonuses to employees o To support the market price of the stock Purchase of treasury stock Treasury stock Cash 45 000 45 000 Sale of treasury stock increase paid in capital Cash Treasury stock Paid in capital from sale Cash Paid in capital from sale Treasury stock 36 000 27 000 9 000 16 000 2 000 18 000 Sale of treasury stock decrease paid in capital Stockholders equity Total common stock paid in capital from sale of treasury stock paid in capital
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