1. LIABILITIES

2. Mugan-Akman 20072 Liabilities obligations of an entity to make a future payment or to deliver goods or services to the third parties in the future in return for cash borrowed or service used or goods acquired Definite vs. estimated liabilities classified according to their due dates –due within one year or the operating cycle are classified as current liabilities – loans or credits that mature in more than one year are classified as long-term liabilities

3. Mugan-Akman 20073 Recognition of Liabilities recognized when the obligation occurs for an entity If not recognized –Understatement of liabilities and assets –Understatement of liabilities and expenses to satisfy the matching and periodicity principles, adjustments are made at the end of the accounting periods

4. Mugan-Akman 20074 Valuation of Liabilities valued at the cash amount necessary to pay back the liability or at the fair value of the goods or services to be provided Value –may be certain –may be estimated

5. Mugan-Akman 20075 Current Liabilities 1.Short Term Bank Loans 2.Current Portion of Long-term Debt 3.Trade Payables 1.Accounts Payable 2.Notes Payable 4.Accruals 5.Unearned Revenues (deferred income) 6.Payroll Liabilities 7.Corporate Income Taxes 8.Value Added Taxes 9.Product Warranty Liability

6. Mugan-Akman 20076 Notes Payable Classification –Purchases on credit Trade Payables –Borrowing Financial Liabilities Presentation Notes with additional interest –Notes Payable+Interest Payable Discounted Notes –Notes Payable-Discount on Notes Payable

7. Mugan-Akman 20077 Payroll Related Liabilities An employee usually receives a payment that is less than the gross pay of that employee- the net pay Deductions: –Required deductions that must be paid by the employee according to tax and social security regulations –Optional deductions authorized by the employee for special purposes (such as private pension plans

8. Mugan-Akman 20078 Payroll Liabilities Employee Income Taxes Stamp Duty Social Security Premiums Unemployment Insurance Premium

9. Mugan-Akman 20079

10. 10 Payroll Entry cost of the employee to the employer is TL 2.450 - employee receives TL 1.444 * SSK premiums – Employer shareTL 390 Unemployment insurance premium- Employer share 60 SSK premium-Employee share 280 Unemployment insurance premium – Employee share 40 Total payable to SSK TL 770

11. Mugan-Akman 200711 Corporate Income Taxes Corporations and limited corporations At a rate of 20% Quarterly Prepaid: as of March 31, June 30, September 30 and December 31 annual corporate tax payment computed for the fiscal year and declared in April the following year

12. Mugan-Akman 200712 Corporate Income Taxes-Example During 2008: Mercan jewelry paid a total of TL 13.850 Net Income for 2008 TL 123.750 Assume Tax rate: 20% Income Tax expense = TL 24.750. The entry at the end of the fiscal year:

13. Mugan-Akman 200713 Deferred Taxation

14. Mugan-Akman 200714 Deferred Taxation

15. Mugan-Akman 200715 Value Added Taxes When a good is sold or service provided –VAT is added to sales price and collected from the customer –NOT a Revenue When a purchase of a good or a service realized –VAT is added to the purchase price and paid to supplier –NOT an Expense VAT received from customers should be reimbursed to the Tax Offices –if VAT on sales > the VAT on purchases →the entity is required to pay the difference to the Tax Office –if VAT on purchases exceeds the VAT on sales → the difference is carried forward to the next month

16. Mugan-Akman 200716 Accounting for VAT transactions 14 April: Purchased 10 items for TL17.110 on credit including 18% VAT 20 April: Sold 22 items for TL 37.642 on credit including 18% VAT 20 May: Filed the VAT return 26 May: Paid the necessary amount

17. Mugan-Akman 200717 VAT entries

18. Mugan-Akman 200718 Provisions and Contingent Liabilities a potential liability arising from a past transaction and that depends on a future event –could be disclosed in the body of the balance sheet with the liabilities –could be disclosed within notes to financial statements certainty of the amount and the payment date determines where they will be disclosed

19. Mugan-Akman 200719 Is the amount of the liability known? YES Recognize liability on the balance sheet NO Can the amount of Liability be reasonably Estimated? YES Is the liability likely to occur? (Probable) YES Disclose in the notes To the financial Statements (CONTINGENT LIABILITY) NO

20. Mugan-Akman 200720 Product Warranty Liabilities When goods and services are sold under warranty coverage A good example of provision matching principle - warranty expenses of sales in a period should be recorded in the same period Subsequent expenditures of warranties are charged against warranty liability

21. Mugan-Akman 200721

22. Mugan-Akman 200722 Long-term Financing Capital or Long-term Liability advantages of raising capital –capital stock is not paid back by the entity –dividends are distributed only if the entity has enough income and cash advantages of long-term liabilities : –Shareholder Control –Tax Effects: Interest payments on liabilities are tax deductible –Financial leverage: Financial leverage or trading on equity means using borrowed money to increase the rate of return to the shareholders

23. Mugan-Akman 200723 Types of Long Term Liabilities Bank Loans Bonds Issued- –bond indenture –bond certificate –interest paid: quarterly, semi-annually or annually

24. Mugan-Akman 200724

25. Mugan-Akman 200725 Types of Long Term Liabilities Bank Loans Bonds Issued- –bond indenture –bond certificate –interest paid: quarterly, semi-annually or annually Installment Loans (consumer loans) Lease Obligations

26. Mugan-Akman 200726 Types of Bonds Time or Serial Bonds Callable Bonds Registered or Bearer Bonds Convertible Bonds

27. Mugan-Akman 200727 Bond terminology Stated rate or coupon rate or nominal rate = contractual rate written on the face of the bond Face value or nominal value = value written on the face of the note Maturity date = date when the bonds will be paid Life of the bond = duration of the bond Maturity value = nominal value Market rate or effective rate of interest or yield = prevalent rate on the market for similar term and risk bonds

28. Mugan-Akman 200728 Stated Interest and Market Interest Rate Stated Interest Rate = Market Interest Rate Bond is sold at Par Stated Interest Rate < Market Interest Rate Bond is sold at Discount Stated interest Rate > Market Interest Rate Bond is Sold at Premium

29. Mugan-Akman 200729 Price Determination Sumatek Corp. decided to issue TL100.000 bonds with a stated interest rate of 11% maturing in 5 years. The interest is payable semiannually on 30 June and 31 December of each year. Interest paid every six months is TL 11.000/2 =TL 5.500. Present Value of the Maturity Value (Principal) (100.000 x 0,558; n=10 i=6%)(Table1)= TL 55.800 Present Value of Interest Payments (5.500 x 7,360; n=10 i=6%)(Table 2)= 40.480 Price of the Bond TL 96.280 If the market rate on 1 January 2004, was 10% If the market rate on 1 January 2004, was 12% Present Value of the Maturity Value (Principal) (100.000 x 0,614; n=10 i=5%)(Table 1)= TL 61.400 Present Value of Interest Payments (5.500 x 7,722; n=10 i=5%)(Table 2)= 42.471 Price of the BondTL 103.871

30. Mugan-Akman 200730 Bond Interest Expense

31. Mugan-Akman 200731 Bonds issued at par Sumatek Corp.,TL100.000 bonds, 11%,5yrs 30 June 2004, the first interest payment date, the Company will pay TL5.500

32. Mugan-Akman 200732 Accounting for Discounts on Bonds Payable The market interest rate on 1 January 2004 - 12% and the TL 100.000 bonds were issued at TL 96.280 or at 96.28 partial balance sheet of Sumatek Corp. after the issue of the bonds will show (in TL ) Bonds Payable100.000 Less: Unamortized Bond Discount3.720 Net Bonds Payable (Outstanding Debt)96.280

33. Mugan-Akman 200733 Effective Interest Method of Amortization of Bond Discounts acceptable method of amortizing the bond discounts interest expense of each period is computed using the market interest rate over the carrying value of the bonds

34. Mugan-Akman 200734 Amortization of Bond Discount (Effective Interest)

35. Mugan-Akman 200735 Amortization of Bond Discount (Effective Interest)

36. Mugan-Akman 200736 Amortization of Bond Discount (Effective Interest)

37. Mugan-Akman 200737 Accounting for Premiums on Bonds Payable Sumatek Corp. issued TL100.000 bonds, stated interest rate of 11% maturing in 5 years on 1 January 2004. The interest on the bonds are payable semiannually on 30 June and 31 December each year. The market interest rate on 1 January 2004 was 10% and the bonds were issued at TL 103.871 partial balance sheet (in TL ) Bonds Payable100.000 Plus: Unamortized Premium3.871 Net Bonds Payable (Outstanding Debt)103.871

38. Mugan-Akman 200738 Amortization of Bond Premium Principal Payment at MaturityTL 100.000 Total Interest Paid in Cash (100.000*11%*5) 55.000 Total Cash Payments till MaturityTL 155.000 Total Cash Received at the Issue Date 103.871 Total Interest Expense of the Bond Issue TL 51.129

39. Mugan-Akman 200739 Effective Interest Method of Amortization of Bond Premiums

40. Mugan-Akman 200740 Effective Interest Method of Amortization of Bond Premiums

41. Mugan-Akman 200741 Effective Interest Method of Amortization of Bond Premiums

42. Mugan-Akman 200742 Installment (consumer) Loans Principal Loan amount: TL 30.000 Loan period: 2 years Monthly installments: TL 2.174 Annual Interest Rate 60%

43. Mugan-Akman 200743 Repayment Schedule of Consumer Loan 30.000 *.05= TL 1.500 29.326 *.05= TL 1.466

44. Mugan-Akman 200744 operating or a capital (finance) lease Capital Lease –Significant risks and benefits of the ownership belong to lessee Present Value of Future Lease Payments- –Recorded as a Liability –Recorded as an asset and depreciated Lease Obligations

45. Mugan-Akman 200745 For example: 8,000 per year for 8 years at 10% interest rate Net Present Value of Future Lease Payments at the date of the lease agreement is TL 42.680 10% * 42.680

46. Mugan-Akman 200746