Current & Long Term Liabilities

Current Liabilities Obligations of an Organization that are due to be paid within one year or one accounting period (whichever is greater) Recorded at: $ value of obligation Two Types: $ value known $ value must be estimated

$ Value Known Accounts Payable Amounts owed from purchases made on account Other Payables From Accrual process Salary Expense Interest Expense

Note Payable Obligation we owe lender Includes both Principal & Interest Record 3 things: Initial Obligation Periodic Interest Final Payoff

Warranty Payable $ Value unknown Matching says…. Estimate Warranty Expense based on % of expected warranty claims from sales Debit Warranty Expense Credit Warranty Payable As the obligations for the warranties are fulfilled we reduce the liability Debit Warranty Payable Credit (it depends) Cash (if we are giving customers back their $) Inventory (if we are giving customers replacement products)

Bonds Bond Payable is a long-term obligation Similar to Notes Payable Record initial obligation Record periodic interest (semi-annually) Record final payoff

Bond Terminology Face Amount, Par value Amount on Bond Document This is always the amount of the obligation that we owe the investors who purchased the bond Amount Received This is the cash $ we received from investors Bond interest rate, stated rate The interest rate that is part of the bond contract This is the interest rate x the face amount of the bond that we will pay our investors semi-annually – this is our obligation Market rate, effective interest rate The prevailing interest rate an investor could earn in the market This is the interest rate x carrying bond amount, our interest expense (the cost of borrowing the $) that we record on our income statements Carrying Bond Amount Face Value of the bond – Discount on Bond Payable (a Contra-Liability account) or Face Value of the bond + Premium on Bond Payable Amortizing Discount or Premium Periodic reduction of Discount or Premium until bond matures Two Methods Effective Interest Straight-Line

Bonds issued at Par Record initial obligation Debit Cash Credit Bonds Payable Record periodic Interest Debit Interest Expense Credit Cash (or Interest Payable) Record final payoff Debit Bond Payable Credit Cash

Bonds Issued at a Discount Initial Obligation Debit Cash Debit Discount on Bond Payable Credit Bonds Payable Periodic Interest Interest Expense Credit Discount on Bond Payable Credit Cash or Interest Payable Final Payoff Debit Bonds Payable Credit Cash

Bonds Issued at Premium Initial Obligation Debit Cash Credit Premium on Bond Payable Credit Bond Payable Periodic Interest Debit Interest Expense Debit Premium on Bond Payable Credit Cash (or Interest Payable) Final Payoff Debit Bond Payable Credit Cash

Amortization Methods Effective Interest Carrying Amount of Bond x market rate % x 6 / 12 (when calculating for 6 months) Debit to Interest Expense Face value of bond x stated rate % x 6 /12 Credit Cash (Interest payable) Difference is amortization of premium or discount Straight Line Determine Discount or Premium Divide this amount by term of Bond x # of payments per year (usually 2) Amortization amount Journal Entry remains the same period to period

Times Interest Earned Ratio TIE = Operating Income / Interest Expense Operating Income = Sales – CGS – Operating Expenses