1. Non-Current Liabilities Chapter 16 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

2. 16 - 2 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objectives 1.Account for basic debentures payable transactions by the straight-line amortisation method. 2.Measure interest expense by the effective interest method. 3.Account for redemption of debentures. 4.Account for conversion of debentures. 5.Show the advantages and disadvantage of borrowing. 6.Account for lease and superannuation liability. Appendix – present and future values

3. 16 - 3 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Debentures: An Introduction l A Debenture is an interest bearing non- current bonds payable. l Debentures are borrowings from multiple lenders called debenture holders. l Debentures have…. – principal (maturity value, face value) – interest rate – interest payment dates – underwriter

4. 16 - 4 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Types of Debentures Term Debentures Serial Debentures Mortgage Debentures Unsecured Note

5. 16 - 5 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Debenture Prices l A debenture is quoted as a percent of its maturity value. l Debentures may be issued at a premium or discount l A quote of 99.5 means that a $1,000 debenture sells for $1,000 × 0.995, or $995. l Debenture prices are affected by... – time to maturity. – credit rating of issuer. – interest rate.

6. 16 - 6 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Present Value l A dollar received today is worth more than a dollar received in the future. l Why – because you can invest it and earn income from it. l $100 invested @ 5% for one year will give $105 in one years time. l It depends upon... – the length of time to the future receipt. – interest rate.

7. 16 - 7 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Debenture Interest Rates l Debentures are sold at market price. l Market price is determined by… – nominal or stated interest rate. – market or effective interest rate. l If market rates are higher than the nominal rate the debentures will be issued at a discount. l A premium if the reverse.

8. 16 - 8 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Issuing Debentures to Borrow Money l On January 1, Brisbane Limited issued $1,000,000 of 10%, 10-year debentures. January 1 Cash1,000,000 Debentures Payable1,000,000 To issue 10%, 10-year debentures January 1 Cash1,000,000 Debentures Payable1,000,000 To issue 10%, 10-year debentures

9. 16 - 9 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Issuing Debentures to Borrow Money l What is the entry for the interest payment of July 1? l $1,000,000 × 10% × 1/2 = $50,000 July 1 Interest Expense50,000 Cash50,000 To record semiannual interest July 1 Interest Expense50,000 Cash50,000 To record semiannual interest

10. 16 - 10 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Issuing Debentures Between Interest Dates l On March 31, Brisbane Limited sells $1,0000,000 of 10%, 10-year debentures dated January 1. March 31 Cash1,025,000 Debentures Payable1,000,000 Interest Payable 25,000 To issue 10%, 10-year debentures at par three months after original issue date. March 31 Cash1,025,000 Debentures Payable1,000,000 Interest Payable 25,000 To issue 10%, 10-year debentures at par three months after original issue date.

11. 16 - 11 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Issuing Debentures Between Interest Dates l What is the July 1 interest expense? l $1,000,000 × 10% × 1/4 = $25,000 July 1 Interest Expense25,000 Interest Payable25,000 Cash50,000 To pay semiannual interest July 1 Interest Expense25,000 Interest Payable25,000 Cash50,000 To pay semiannual interest

12. 16 - 12 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia A 10-year, $1,000,000 Debenture issue is sold by Hobart Limited at 99.25 on January 1. A 10-year, $1,000,000 Debenture issue is sold by Hobart Limited at 99.25 on January 1. Cash992,500 Discount on Debentures 7,500 Debentures Payable1,000,000 To issue 10%, 10-year debentures at a discount Cash992,500 Discount on Debentures 7,500 Debentures Payable1,000,000 To issue 10%, 10-year debentures at a discount Issuing Debentures at a Discount

13. 16 - 13 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Debentures l See the Esanda debenture certificate Exhibit 16-1 page 633 of your textbook. Esanda Finance Corporation Limited Certificate of Investment Esanda 85 Spring Street Melbourne Vic 3000 DEBENTURE STOCK Investor number: 000058763Certificate number: 1371967008 Date of issue:01/07/00 Anne L Citizen 24 River St LISMORE NSW 2480

14. 16 - 14 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Account for basic debentures payable transactions by the straight-line amortisation method. Objective 1

15. 16 - 15 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Straight-Line Amortisation of Debenture Discount l This method amortises the debenture discount by dividing it into equal amounts for each interest period. l Hobart Limited would amortise the $7,500 discount over 20 periods (not years). l $7,500 ÷ 20 = $375 per period

16. 16 - 16 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia July 1 Interest Expense50,375 Cash50,000 Discount on Debentures 375 Paid half-yearly interest and amortised discount on debentures payable July 1 Interest Expense50,375 Cash50,000 Discount on Debentures 375 Paid half-yearly interest and amortised discount on debentures payable Straight-Line Amortisation of Debenture Discount

17. 16 - 17 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Darwin Limited sold a 10%, 10-year (20 periods), $1,000,000 debenture issue at a price of 101 Darwin Limited sold a 10%, 10-year (20 periods), $1,000,000 debenture issue at a price of 101 Cash1,010,000 Debentures Payable1,000,000 Premium on Debentures 10,000 Issued debentures at a premium Cash1,010,000 Debentures Payable1,000,000 Premium on Debentures 10,000 Issued debentures at a premium Issuing Debentures Payable at a Premium

18. 16 - 18 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Issuing Debentures Payable at a Premium Darwin Limited Statement of Financial Position (immediately after issue of the debentures) Darwin Limited Statement of Financial Position (immediately after issue of the debentures) Non-current liabilities: Debentures payable, 10%, due 2015 $1,000,000 Premium of debentures payable 10,000 $1,010,000 Non-current liabilities: Debentures payable, 10%, due 2015 $1,000,000 Premium of debentures payable 10,000 $1,010,000

19. 16 - 19 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia July 1 Interest Expense40,500 Premium on Debentures 500 Cash50,000 Paid half-yearly interest and amortised premium on debentures payable July 1 Interest Expense40,500 Premium on Debentures 500 Cash50,000 Paid half-yearly interest and amortised premium on debentures payable Straight-Line Amortisation of Debenture Premium

20. 16 - 20 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Non-current liabilities: Debentures payable, 10%, due 2015 $1,000,000 Premium on debentures payable 9,000 $1,009,000 Non-current liabilities: Debentures payable, 10%, due 2015 $1,000,000 Premium on debentures payable 9,000 $1,009,000 Reporting Debentures Payable Darwin Limited Statement of Financial Position ( one year after issue of the debentures) Darwin Limited Statement of Financial Position ( one year after issue of the debentures)

21. 16 - 21 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Adjusting Entries for Interest Expense l Canberra Limited issued $150,000 of its 8%, 10-year debentures at a $3,000 discount on April 1, 2004. l The interest payments occur on March 31 and September 30 each year. l Canberra Limited’s financial year ends on June 30. l What accounts are involved?

22. 16 - 22 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Adjusting Entries for Interest Expense l Interest Payable: $150,000 × 8% × 3/12 = $3,000 l Discount Amortisation: $3,000 ÷ 10 (years) × 3/12 = $75 l Interest Expense: $3,000 + $75 = $3,075 l What is the adjusting entry?

23. 16 - 23 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Adjusting Entries for Interest Expense June 30, 2004 Interest Expense3,075 Interest Payable3,000 Discount on Debentures 75 Accrued three months’ interest and amortised discount on debentures payable June 30, 2004 Interest Expense3,075 Interest Payable3,000 Discount on Debentures 75 Accrued three months’ interest and amortised discount on debentures payable What is the entry on October 31, 2004?

24. 16 - 24 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Adjusting Entries for Interest Expense October 31, 2004 Interest Expense3,075 Interest Payable3,000 Cash6,000 Discount on Debentures Payable 75 Paid half-yearly interest, part of which was accrued, and amortised three months’ discount on debentures payable October 31, 2004 Interest Expense3,075 Interest Payable3,000 Cash6,000 Discount on Debentures Payable 75 Paid half-yearly interest, part of which was accrued, and amortised three months’ discount on debentures payable

25. 16 - 25 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Measure interest expense by the effective-interest method. Objective 2

26. 16 - 26 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method of Amortisation l The effective-interest method keeps interest expense at the same percentage over any debenture’s life. l Generally accepted accounting principles require that interest expense be measured using the effective-interest method.

27. 16 - 27 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method: Debenture Discount l Assume that Wellington Limited issues $100,000 of its 9% debentures at a discount of $3,851, at a time when the market rate of interest is 10%. l These debentures mature in five years and pay interest half-yearly.

28. 16 - 28 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method: Debenture Discount Cash96,149 Discount on Debentures 3,851 Debentures Payable100,000 To issue 10%, 10-year debentures at a discount Cash96,149 Discount on Debentures 3,851 Debentures Payable100,000 To issue 10%, 10-year debentures at a discount

29. 16 - 29 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method: Debenture Discount l What is the interest expense at the end of period one? l $96,149 × 10% × 6/12 = $4,807 l What is the interest payment at the end of period one? l $100,000 × 9% × 6/12 = $4,500 l $4,807 – $4,500 = $307 amortisation

30. 16 - 30 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method: Debenture Discount End ofCarrying InterestCash Period ValueExpensePaid Amortisation Issue 96,149 Date 1 96,456 4,8074,500307 2 96,779 4,8234,500323 3 97,118 4,8394,500339 4 97,474 4,8564,500356 End ofCarrying InterestCash Period ValueExpensePaid Amortisation Issue 96,149 Date 1 96,456 4,8074,500307 2 96,779 4,8234,500323 3 97,118 4,8394,500339 4 97,474 4,8564,500356

31. 16 - 31 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method: Debenture Premium l Assume the Auckland Limited issues a $100,000, 5-year, 9% Debenture to yield 8%, at a premium of $4,100. l The first period interest expense is calculated as follows: l $104,100 × 8% × 6/12 = $4,164

32. 16 - 32 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Effective-Interest Method: Debenture Premium End ofCarrying InterestCash Period ValueExpensePaid Amortisation Issue104,100 Date 1103,764 4,1644,500336 2103,415 4,1514,500349 3103,052 4,1374,500363 4102,674 4,1224,500378 End ofCarrying InterestCash Period ValueExpensePaid Amortisation Issue104,100 Date 1103,764 4,1644,500336 2103,415 4,1514,500349 3103,052 4,1374,500363 4102,674 4,1224,500378

33. 16 - 33 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Account for redemption of debentures. Objective 3

34. 16 - 34 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Redemption of Debentures l To redeem a debenture early, the issuer can.. – purchase the debentures in the open market, or – exercise a call option. l A call option is a clause that allows the debenture issuer to redeem the debentures at a specified price (usually above par) on or after a specified date. l The journal entry is the same in either case.

35. 16 - 35 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Redemption of Debentures Example $500,000 of 12% debentures with an unamortised premium of $20,000 are purchased for $498,000 and retired. Debentures Payable500,000 Premium of Debentures 20,000 Cash498,000 Gain on Retirement of Debentures 22,000 Redeemed debentures Debentures Payable500,000 Premium of Debentures 20,000 Cash498,000 Gain on Retirement of Debentures 22,000 Redeemed debentures

36. 16 - 36 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Account for conversion of debentures. Objective 4

37. 16 - 37 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Convertible Debentures and Notes l Convertible debentures (or notes) give the holder the option of exchanging the debenture for a specified number of ordinary shares. l If a debenture is converted into ordinary shares, shareholders’ equity is increased by the carrying amount of the debentures converted.

38. 16 - 38 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Current Portion of Long-term Debt l Serial debentures and serial notes are payable in instalments. l The portion payable within one year is a current liability. l The remaining debt is long term.

39. 16 - 39 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Show the advantages and disadvantages of borrowing. Objective 5

40. 16 - 40 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Equity financing creates no liabilities and no interest burden. It is less risky to the issuing company. It may dilute ownership interest of existing shareholders. Equity financing creates no liabilities and no interest burden. It is less risky to the issuing company. It may dilute ownership interest of existing shareholders. Debt financing does not dilute control. It usually results in higher earnings per share. It reduces total net profits and may impose financial restrictions on the company. Debt financing does not dilute control. It usually results in higher earnings per share. It reduces total net profits and may impose financial restrictions on the company. Issuing Debentures versus Shares

41. 16 - 41 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Advantage of Issuing Debentures versus Shares Example l Suppose that Vista Limited, with net profits of $300,000 and with 100,000 ordinary shares, needs $500,000 for expansion. l Money can be borrowed at 10% interest. l The income tax rate is 40%. l Or……..

42. 16 - 42 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Advantage of Issuing Debentures versus Shares Example l …….50,000 ordinary shares can be issued for $500,000. l Management believes that the new cash can be invested in operations to earn profits of $200,000 before interest and taxes. l Should the company borrow the money or issue additional ordinary shares?

43. 16 - 43 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Advantage of Issuing Debentures versus Shares Example Borrow $500,000 Expected net profit on the new project$200,000 Interest expense– 50,000 Project profit before income tax$150,000 Income tax expense– 60,000 Project net profit$ 90,000 Net profit before expansion$300,000 Total profit$390,000 Expected net profit on the new project$200,000 Interest expense– 50,000 Project profit before income tax$150,000 Income tax expense– 60,000 Project net profit$ 90,000 Net profit before expansion$300,000 Total profit$390,000

44. 16 - 44 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Advantage of Issuing Debentures versus Stock Example Issue 50,000 ordinary shares at $10 per share Expected net profit on the new project$200,000 Income tax expense– 80,000 Project net profit$120,000 Net profit before expansion$300,000 Total profit$420,000 Expected net profit on the new project$200,000 Income tax expense– 80,000 Project net profit$120,000 Net profit before expansion$300,000 Total profit$420,000

45. 16 - 45 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Advantage of Issuing Debentures versus Stock Example Borrow $500,000: $390,000 ÷ 100,000 = $3.90 earnings per share Borrow $500,000: $390,000 ÷ 100,000 = $3.90 earnings per share Issue $500,000 ordinary shares: $420,000 ÷ 150,000 = $2.80 earnings per share Issue $500,000 ordinary shares: $420,000 ÷ 150,000 = $2.80 earnings per share

46. 16 - 46 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Account for lease and superannuation liabilities. Objective 6

47. 16 - 47 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Leases l A lease is a rental agreement that allows the lessee use of an asset without a large cash down payment. l For accounting purposes there are two types of leases: 1 Operating leases 2 Finance leases

48. 16 - 48 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Finance Leases l AASB 1008 states a lease will be classified as finance if both of the following conditions exist: ä The lease is non-cancellable ä The term covers 75% or more of the estimated useful life of the asset or ä The present value of the lease exceeds 90% of the market value of the asset (or there is a bargain purchase option).

49. 16 - 49 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Building under Lease93,650 Cash 10,000 Lease Liability (PV of future payments) 83,650 Acquired a building and made first annual payment under a finance lease Building under Lease93,650 Cash 10,000 Lease Liability (PV of future payments) 83,650 Acquired a building and made first annual payment under a finance lease Accounting for a Finance Lease Leased a building for 20 years with annual lease payments of $10,000

50. 16 - 50 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Amortisation Expense (93,560/20) 4,683 Accumulated Amortisation 4,693 Recorded amortisation on leased building Amortisation Expense (93,560/20) 4,683 Accumulated Amortisation 4,693 Recorded amortisation on leased building Accounting for a Finance Lease Amortised (depreciated) the building annually

51. 16 - 51 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Interest Expense ($83,650 x 10%) 8,365 Accrued Interest Payable8,365 Accrued interest on lease liability Interest Expense ($83,650 x 10%) 8,365 Accrued Interest Payable8,365 Accrued interest on lease liability Accounting for a Finance Lease Accrued interest at the end of the first year (lease liability times the interest rate) Accrued interest at the end of the first year (lease liability times the interest rate)

52. 16 - 52 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Lease Liability ($10,000 - $8,365) 1,635 Accrued Interest Payable8,365 Cash10,000 Made second annual lease payment on building. Lease Liability ($10,000 - $8,365) 1,635 Accrued Interest Payable8,365 Cash10,000 Made second annual lease payment on building. Accounting for a Finance Lease Made the second lease payment on the first day of the new financial year Made the second lease payment on the first day of the new financial year

53. 16 - 53 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Superannuation Liabilities l As the employees work, the company accrues the expense and the liability of providing benefits during retirement – periodic pension payments or a single lump sum. l For defined contribution plans determining the expense is straightforward. l Debit Superannuation Expense l Credit Cash

54. 16 - 54 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Superannuation Liabilities l Defined benefit plans – the expense is much more difficult to calculate. l At the end of each period, the company compares the market value of the superannuation plan assets with the accumulated benefit obligation of the plan. l The plan may be underfunded or overfunded l (IAS 19 requires these amounts to be reported as liabilities or assets.)

55. 16 - 55 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix Present and future values

56. 16 - 56 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix l What is the present value of an amount of $4,500 to be received for 10 periods if interest rates are 5%? l The present value annuity table (page 675 of your textbook) indicates that 7.722 is the factor for 10 periods at 5%. l The present value of the 10 year stream of money is $4,500 × 7.722 = $34,749.

57. 16 - 57 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix l What is the present value of a lump sum of $100,000, 10 periods from now at 5%? l The present value table (page 674 of your textbook) indicates that.614 is the factor to be used in determining the value of $100,000 to be received 10 periods from now at 5%. l $100,000 ×.614 = $61,400

58. 16 - 58 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Total present value = $34,749 + $61,400 = $96,149 What is the total present value of these amounts? Appendix

59. 16 - 59 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix l What is the present value of an amount of $4,500 to be received for 10 periods if interest rates are 4%? l The present value annuity table indicates that 8.111 is the factor for 10 periods at 4%. l The present value of the future stream of money is $4,500 × 8.111 = $36,500.

60. 16 - 60 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix l What is the present value of a lump sum of $100,000, 10 periods from now at 4%? l The present value table indicates that.676 is the factor to be used in determining the value of $100,000 to be received 10 periods from now at 4%. l $100,000 ×.676 = $67,600

61. 16 - 61 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix Total present value = $36,500 + $67,600 = $104,100 What is the total present value of these amounts?

62. 16 - 62 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia End of Chapter 16