Accounting 215 Autumn 2013 Liabilities – Chapter 9 Current Liabilities Current liabilities are liabilities that a firm expects to satisfy with current assets. Examples - Salaries payable - Salary withholdings - Notes payable - Line of credit - Current portion of long term debt Notes Payable - Once a note is acquired, the following journal entry is recorded: Cash (+A) XX Notes Payable (+L) XX - Interest accrues over the life of the note and is calculated as: o Interest = Principal x Interest Rate x Time - The adjusting journal entry to record interest expense that is accrued but not paid is: Interest Expense (+E, -SE) YY Interest Payable (+L) YY - The journal entry to record the payment of interest that has not been accrued is: Interest Expense (+E, -SE) ZZ Cash (-A) ZZ - The journal entry to record the payment of interest that has been accrued is: Interest Payable (-L) YY Cash (-A) YY Contingencies - Contingent gain - if an existing, uncertain situation might result in a gain o Do not record contingent gains in the financial statements but may be discussed in the footnotes - Contingent liability – if an existing, uncertain situation might result in a loss o E.g. Warranty payable, lawsuits Ability to estimate Reasonably estimate Not reasonably estimate Likelihood of having to pay Probable Record liability and disclose details in footnotes Disclose information in footnotes Reasonably probable Disclose information in footnotes Disclose information in footnotes Remote No disclosure required No disclosure requiredAccounting 215 Autumn 2013 Liquidity – ability of a firm to cover its short-term obligations with short-term assets - Working capital = Current assets - current liabilities - Current ratio = Current assets/current liabilities Leases - Capital lease – a lease that meets one of the following four criteria: 1. Lease term is 75% or more of the asset’s expected economic life 2. Ownership of the asset is transferred to the lessee at the end of the lease term 3. Lease contract permits the lessee to purchase the asset at a price that is lower than the fair market value 4. The present value of the lease payments is 90% or more of the fair market value of the asset when the lease is signed - Operating lease – a lease which does not meet any of the four criteria Present Value Concepts - Present value of a single amount – the worth to you today of receiving that amount sometime in the future o Calculation: Present value = Amount to be received in the future x PV Factor (obtained from table) - An annuity is a series of consecutive payments that are:  An equal dollar amount each period  Interest periods of equal length (year, half a year, quarter, or month)  An equal interest rate each interest period - Present value of an annuity – the value now of a series of equal amounts to be received (or paid out) for some specified number of periods in the future o Calculation: Present value of an annuity = Annuity amount paid/received each period x PV of an annuity Factor (obtained from table) 1 2 3 2 3 1 PV of an annuity Annuity Amount Future Value PV of $1 Annuity Amount Annuity AmountAccounting 215 Autumn 2013 Notes Payable On November 1, 2012, Neiman Marcus borrowed $4.8 million cash from Texas Capital Bank for working capital purposes and signed an interest-bearing note due in six months. The interest rate was 8 percent per year payable at maturity. The accounting period ends December 31. Requirements: 1. Give the journal entry to record the note on November 1. 2. Give any adjusting entry required at the end of the annual accounting period. 3. Give the journal entry to record payment of the note and interest on the maturity date, April 30, 2013. Contingencies The ink-jet printing division of Environmental Printing has grown tremendously in recent years. Assume the following transactions related to the ink-jet division occur during the year ended December 31, 2012. 1. Environmental Printing was sued for $10 million by Addamax. Plaintiff alleges that the defendants formed an unlawful joint venture and drove it out of business. The case is expected to go to trial later this year. The likelihood of payment is reasonably possible. 2. Environmental Printing is the plaintiff in an $8 million lawsuit filed against a competitor in the high-end color-printer market. Environmental Printing expects to win the case and be awarded between $5.5 and $8 million. 3. Environmental Printing recently became aware of a design flaw in one of its ink-jet printers. A product recall appears probable. Such an action would likely cost the company between $400,000 and $800,000. Requirement: 1. Determine if each event results in a contingency that should be recorded, and if so, record the transaction. Present Value of an Annuity Calculate the present value of the following annuities, assuming each payment is made at the end of each compounding period. # Annuity Payment Annual Rate Interest Compounded Period Invested 1 $4,000 7% Annually 5 years 2 $9,000 8% Semi-Annually 3 years 3 $3,000 8% Quarterly 2 yearsAccounting 215 Autumn 2013 PRESENT VALUE OF $1n \ i 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0%1 0.99010 0.98522 0.98039 0.97561 0.97087 0.96618 0.96154 0.95694 0.95238 0.94787 0.94340 0.93897 0.93458 0.93023 0.92593 0.92166 0.91743 0.91324 0.909092 0.98030 0.97066 0.96117 0.95181 0.94260 0.93351 0.92456 0.91573 0.90703 0.89845 0.89000 0.88166 0.87344 0.86533 0.85734 0.84946 0.84168 0.83401 0.826453 0.97059 0.95632 0.94232 0.92860 0.91514 0.90194 0.88900 0.87630 0.86384 0.85161 0.83962 0.82785 0.81630 0.80496 0.79383 0.78291 0.77218 0.76165 0.751314 0.96098 0.94218 0.92385 0.90595 0.88849 0.87144 0.85480 0.83856 0.82270 0.80722 0.79209 0.77732 0.76290 0.74880 0.73503 0.72157 0.70843 0.69557 0.683015 0.95147 0.92826 0.90573 0.88385 0.86261 0.84197 0.82193 0.80245 0.78353 0.76513 0.74726 0.72988 0.71299 0.69656 0.68058 0.66505 0.64993 0.63523 0.620926 0.94205 0.91454 0.88797 0.86230 0.83748 0.81350 0.79031 0.76790 0.74622 0.72525 0.70496 0.68533 0.66634 0.64796 0.63017 0.61295 0.59627 0.58012 0.564477 0.93272 0.90103 0.87056 0.84127 0.81309 0.78599 0.75992 0.73483 0.71068 0.68744 0.66506 0.64351 0.62275 0.60275 0.58349 0.56493 0.54703 0.52979 0.513168 0.92348 0.88771 0.85349 0.82075 0.78941 0.75941