PRINCIPLES OF FINANCIAL ACCOUNTING Chapter 10

Liabilities Definition Current liability: The debts and obligations of a business. Liabilities represent claims of creditors on the assets of a business. Current liability: Debts expected to be paid within one year or the operating cycle, whichever is longer. Debts to be paid from existing current assets or through the creation of other current liabilities.

Types of current liabilities Notes Payable Refer to example on page 453 Sales Tax Payable Refer to example on page 454 Payroll and payroll taxes payable Refer to example on page 355 Unearned revenues Refer to the example on page 456 Current maturities of long-term debt

Analysis – Liquidity ratios Working capital – Current assets less current liabilities Current ratio – Current assets divided by current liabilities Acid test – Cash + Short term Investments + Net receivables divided by current liabilities

Long-term debt Types of bonds: Secured bonds Mortgage bonds Sinking fund Unsecured bonds – debenture bonds Term or serial bonds – several maturity dates Convertible and Callable Bonds

Bond terms Bond indenture – the bond contract Face value – the principal at maturity Contractual interest rate – interest paid on the bond Bond certificates

Determining the market value of bonds Present value of the maturity value Plus the present value of the interest payments At the rate the bondholder selects as yield rate

Bond journal entries Sale of bonds at face value – example on page 466 Sale of bonds at a discount – example on page 468 Sale of bonds at a premium – example on page 470

Analysis Debt to total assets ratio: Times interest earned ration: Total liabilities / total assets Times interest earned ration: Net income + interest expense + income tax / Interest expense

Contingent Liabilities Accrue (record journal entry) if the loss is probable to happen and can be reasonably estimated. Report only (footnote) if it does meet the above criteria unless the loss is remote then no disclosure is needed.

Lease Liabilities Operating lease – generally temporary Report lease payments as Rent expense Capital leases – Fair market value of the asset and the related liability for lease payments are recorded on the balance sheet. – Most companies try to avoid this.

Assignment E10-1 E10-4 E10-5 E10-6 E10-8 BYP10-2 BYP10-10 part a only