1. Current and Long-Term Liabilities Chapter 9

2. Account for current liabilities and contingent liabilities.

3. Current Liabilities Current liabilities are obligations due within one year or within the company’s normal operating cycle if it is longer than one year.

4. Current Liabilities Accounts payable Short-term notes payable Sales tax payable Current portion of long-term debt Accrued expenses Payroll liabilities Unearned revenues

5. Current Liabilities Accounts payable are amounts owed to suppliers for goods or services purchased on account. Short-term notes payable are notes payable due within one year.

6. Short-Term Notes Payable In addition to recording the note payable, the business must also pay interest expense. On January 30, a business purchased inventory for $8,000 by issuing a 1-year, 10% note payable. The fiscal year ends on April 30.

7. Short-Term Notes Payable January 30 Inventory8,000 Notes Payable8,000 Purchase of inventory by issuing a one-year, 10% note How much interest was accrued as of April 30? $8,000 × 10% × (3/12) = $200

8. Short-Term Notes Payable How is the payment at maturity recorded? January 30 Note Payable8,000 Interest Payable 200 Interest Expense 600 Cash8,800 $8,000 × 10% × (9/12) = $600

9. Accrued Expenses These are expenses that have been incurred but not recorded. These are expenses that have been incurred but not recorded. Salaries Taxes withheld Interest Utilities Salaries Taxes withheld Interest Utilities

10. Payroll Liabilities Salary Expense10,000 Employee Income Tax Payable1,200 FICA Tax Payable 800 Salary Payable8,000 To record salary expense

11. Unearned Revenues Assume that a magazine charges a client $750 for a three-year subscription. Assume that a magazine charges a client $750 for a three-year subscription.

12. Unearned Revenues January 1 Cash750 Unearned Revenue750 To receive cash for a three-year subscription December 31 Unearned Revenue250 Subscription Revenue250 To record revenue earned at the end of the year

13. Unearned Revenues December 31, Balance SheetYear 1Year 2Year 3 Current liabilities: Unearned subscription revenue$250$250$-0- Long-term liabilities: Unearned subscription revenue$250$-0-$-0- Income StatementYear 1Year 2Year 3 Revenues: Subscription revenue$250$250$250

14. Current Liabilities That Must Be Estimated Estimated Warranty Payable Assume that Black & Decker made sales of $200,000,000 subject to product warranties. What is the estimated warranty expense? Black & Decker estimates that 3% of the products it sells this year will require repair or replacement. $200,000,000 ×.03 = $6,000,000

15. Estimated Warranty Payable Warranty Expense6,000,000 Estimated Warranty Payable6,000,000 To accrue warranty expense Warranty Expense6,000,000 Estimated Warranty Payable6,000,000 To accrue warranty expense

16. Estimated Warranty Payable Assume that defective merchandise totals $5,800,000. Estimated Warranty Payable5,800,000 Inventory5,800,000 To replace defective products sold under warranty Black & Decker will replace it and record the following:

17. Contingent Liabilities They are a potential liability that depends on a future event arising out of past events. They are a potential liability that depends on a future event arising out of past events. 1. Record an actual liability if it is probable that the loss will occur and the amount can be reasonably estimated. 1. Record an actual liability if it is probable that the loss will occur and the amount can be reasonably estimated.

18. Contingent Liabilities 2. Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur. 2. Report a contingent liability in the notes to the financial statement if it is reasonably possible that a loss or expense will occur. 3. There is no reason to report a contingent loss that is remote – unlikely to occur. 3. There is no reason to report a contingent loss that is remote – unlikely to occur.

19. Bonds: An Introduction A bond is an interest bearing long-term note payable. A bond is an interest bearing long-term note payable. Principal Interest rate Payment dates

20. Bond Prices Bond prices are quoted at a percent of their maturity value. A quote of 101½ means that a $1,000 bond sells for $1,000 × 1.015 = $1,015. A $1,000 bond quoted at 88 3 / 8 is priced at $1,000 × 0.88375 = $883.75.

21. Bond Prices A bond issued at a price above its face (par) value is issued at a premium. A bond issued at a price below face (par) value has a discount. As a bond nears maturity, its market price moves toward par value.

22. Present Value The amount invested today receives a greater amount at a future date, which is called the present value of a future amount. the amount of the future receipt. the length of time to the future receipt. the interest rate for the period.

23. Bond Interest Rates Bonds are sold at market price, which is the amount that investors are willing to pay at any given time. present value of the principal to be received at maturity. present value of periodic interest payments.

24. Bond Interest Rates Contract rate (stated rate) Market rate (effective rate)

25. Account for bonds payable transactions.

26. Issuing Bonds Payable at Par Value On January 1, Chrysler Corporation issued $50,000,000 of 9%, 5-year bonds at par. On January 1, Chrysler Corporation issued $50,000,000 of 9%, 5-year bonds at par. January 1 Cash50,000,000 Bonds Payable50,000,000 To issue 9%, 5-year bonds at par January 1 Cash50,000,000 Bonds Payable50,000,000 To issue 9%, 5-year bonds at par

27. Issuing Bonds Payable at Par Value What is the entry for the interest payment of July 1? $50,000,000 × 9% × 6/12 = $2,250,000 July 1 Interest Expense2,250,000 Cash2,250,000 To pay semiannual interest July 1 Interest Expense2,250,000 Cash2,250,000 To pay semiannual interest

28. Issuing Bonds Payable at Par Value What is the entry to accrue interest on December 31? $50,000,000 × 9% × 6/12 = $2,250,000 December 1 Interest Expense2,250,000 Interest Payable 2,250,000 To accrue interest December 1 Interest Expense2,250,000 Interest Payable 2,250,000 To accrue interest

29. Chrysler issues $100,000 of its 9%, five-year bonds when the market interest rate is 10%. Cash96,149 Discount on Bonds Payable 3,851 Bonds Payable100,000 To issue 9%, 5-year bonds at a discount Issuing Bonds Payable at a Discount Chrysler receives $96,149 at issuance.

30. Issuing Bonds Payable at a Discount Chrysler’s balance sheet immediately after issuance of the bonds: Total current liabilities$ XXX Long-term liabilities: Bonds payable, 9%, due 2009$100,000 Discount on bonds payable – 3,851$96,149 Discount on Bonds Payable is a contra account to Bonds Payable, a decrease in liabilities.

31. Measure interest expense.

32. Amortization Table on Bonds Issued at a Discount 1/1/04 7/1/04 1/1/05 7/1/05 1/1/09 $4,500 4,500 $4,807 4,823 4,839 4,961 $307 323 339 461 $3,851 3,544 3,221 2,882 -0- $ 96,149 96,456 96,779 97,118 100,000 Interest Date Interest Payment Interest Expense Discount Amort. Discount Account Balance Bond Carrying Amount

33. Interest Expense on Bonds Issued at a Discount On July 1, 2004, Chrysler makes the first $4,500 semiannual interest payment and also amortizes (decreases) the bond discount. July 1, 2004 Interest Expense4,807 Discount on Bonds Payable 307 Cash4,500 To pay semiannual interest and amortize bond discount

34. Interest Expense on Bonds Issued at a Discount At December 31, 2004, Chrysler accrues interest and amortizes the bond discount for July through December. December 31, 2004 Interest Expense4,823 Discount on Bonds Payable 323 Interest Payable4,500 To accrue semiannual interest and amortize bond discount

35. Interest Expense on Bonds Issued at a Discount Bonds Payable Discount on Bonds Payable 100,0003,851 307 July 1 323 Dec. 31 3,221 Bond carrying amount: $100,000 – $3,221 = $96,779 Chrysler’s bond accounts as of December 31, 2004.

36. Chrysler Corporation issues $100,000 of 9%, five-year bonds when the market interest rate is 8%. Cash104,100 Bonds Payable100,000 Premium onBonds Payable 4,100 To issue 9% bonds at a premium Issuing Bonds Payable at a Premium Chrysler receives $104,100 at issuance.

37. Issuing Bonds Payable at a Premium Chrysler’s balance sheet immediately after issuance of the bonds: Total current liabilities$ XXX Long-term liabilities: Bonds payable$100,000 Premium on bonds payable 4,100 $104,100 Premium on Bonds Payable is added to the Balance of Bonds Payable to determine the carrying amount.

38. Amortization Table on Bonds Issued at a Premium 1/1/04 7/1/04 1/1/05 7/1/05 1/1/09 $4,500 4,500 $4,164 4,151 4,137 3,955 $336 349 363 545 $4,100 3,764 3,415 3,052 -0- $104,100 103,764 103,415 103,052 100,000 Interest Date Interest Payment Interest Expense Premium Amort. Premium Account Balance Bond Carrying Amount

39. Interest Expense on Bonds Issued at a Premium On July 1, 2004, Chrysler makes the first $4,500 semiannual interest payment and also amortizes (decreases) the bond premium. July 1, 2004 Interest Expense4,164 Premium on Bonds Payable 336 Cash4,500 To pay semiannual interest and amortize bond premium

40. Straight-Line Amortization This method amortizes the bond discount or premium by dividing it into equal amounts for each interest period. Chrysler would amortize the $4,100 premium over 10 periods. $4,100 ÷ 10 = $410 per period

41. Leases

42. Long-Term Liabilities: Leases Tenant (lessee) makes rent payments to the property owner (lessor). Operating Capital

43. Long-Term Liabilities: Leases It transfers title at the end of the term. The present value of the lease payments is 90% or more of the market value of the leased asset. It contains a bargain purchase option. The lease terms cover 75% or more of the estimated useful life of the leased asset.

44. End of Chapter 9