1. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-1 LIABILITIES Chapter 10

2. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-2 The acquisition of assets is financed from two sources: Funds from creditors, with a definite due date, and sometimes bearing interest. Funds from owners DEBT EQUITY Distinction Between Debt and Equity

3. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-3 I.O.U. Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or lessMaturity > 1 year Current Liabilities Noncurrent Liabilities The Nature of Liabilities

4. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-4 Short-term obligations to suppliers for purchases of merchandise and to others for goods and services. Merchandise inventory invoices Shipping charges Utility and phone bills Office supplies invoices Current Liabilities Accounts Payable

5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-5 Total Notes Payable Current Notes Payable Noncurrent Notes Payable When a company borrows money, a note payable is created. Current Portion of Notes Payable The portion of a note payable that is due within one year, or one operating cycle, whichever is longer. When a company borrows money, a note payable is created. Current Portion of Notes Payable The portion of a note payable that is due within one year, or one operating cycle, whichever is longer. Current Liabilities Notes Payable

6. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-6 PROMISSORY NOTE Location Date after this date promises to pay to the order of the sum of with interest at the rate of per annum. signed title Miami, FlNov. 1, 2001 Six months Porter Company John Caldwell Security National Bank $10,000.00 12.0% treasurer Notes Payable

7. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-7 On November 1, 2001, Porter Company would make the following entry. At the balance sheet date, interest must be accrued related to this note. Notes Payable

8. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-8 The interest formula includes three variables that must be considered when computing interest: Interest = Principal × Interest Rate × Time When computing interest for one year, “Time” equals 1. When the computation period is less than one year, then “Time” is a fraction. For example, if we needed to compute interest for 3 months, “Time” would be 3/12. Interest Payable

9. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-9 What entry would Porter Company make on December 31, the fiscal year-end? $10,000  12%  2 / 12 = $200 Interest Payable – Example

10. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-10 Net Pay Medicare Taxes State and Local Income Taxes FICA Taxes Federal Income Tax Voluntary Deductions Gross Pay Payroll Liabilities

11. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-11 Deferred revenue is recorded. a liability account. Cash is received in advance. Cash is sometimes collected from the customer before the revenue is actually earned. Earned revenue is recorded. As the earnings process is completed.. Unearned Revenue

12. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-12 Large debt needs are often filled by installment notes payable or issuing bonds. Long-Term Debt

13. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-13 Long-term notes that call for a series of installment payments. Each payment covers interest for the period AND a portion of the principal. With each payment, the interest portion gets smaller and the principal portion gets larger. Installment Notes Payable

14. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-14 ÊIdentify the unpaid principal balance. ËUnpaid Principal × Interest rate = Interest expense. ÌInstallment payment - Interest expense = Reduction in unpaid principal balance. ÍCompute new unpaid principal balance. ÊIdentify the unpaid principal balance. ËUnpaid Principal × Interest rate = Interest expense. ÌInstallment payment - Interest expense = Reduction in unpaid principal balance. ÍCompute new unpaid principal balance. Allocating Installment Payments Between Interest and Principal

15. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-15 On January 1, 2003, Rocket Corp. borrowed $7,581.57 from First Bank of River City. The loan was a five-year loan and had an interest rate of 10%. The annual payment is $2,000. Prepare an amortization table for Rocket Corp.’s loan. On January 1, 2003, Rocket Corp. borrowed $7,581.57 from First Bank of River City. The loan was a five-year loan and had an interest rate of 10%. The annual payment is $2,000. Prepare an amortization table for Rocket Corp.’s loan. Allocating Installment Payments Between Interest and Principal

16. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-16 Now, prepare the entry for the first payment on December 31, 2003. Allocating Installment Payments Between Interest and Principal

17. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-17 The information needed for the journal entry can be found on the amortization table. The payment amount, the interest expense, and the amount to credit to principal are all on the table. Allocating Installment Payments Between Interest and Principal

18. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-18 lBonds usually involve the borrowing of a large sum of money, called principal. lThe principal is usually paid back as a lump sum at the end of the bond period. lIndividual bonds are often denominated with a par value, or face value, of $1,000. lBonds usually involve the borrowing of a large sum of money, called principal. lThe principal is usually paid back as a lump sum at the end of the bond period. lIndividual bonds are often denominated with a par value, or face value, of $1,000. Bonds Payable

19. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-19  Bonds usually carry a stated rate of interest, also called a contract rate.  Interest is normally paid semiannually.  Interest is computed as: Interest = Principal × Stated Rate × Time Bonds Payable

20. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-20  Bonds are issued through an intermediary called an underwriter.  Bonds can be sold on organized securities exchanges.  Bond prices are usually quoted as a percentage of the face amount. For example, a $1,000 bond priced at 102 would sell for $1,020.  Bonds are issued through an intermediary called an underwriter.  Bonds can be sold on organized securities exchanges.  Bond prices are usually quoted as a percentage of the face amount. For example, a $1,000 bond priced at 102 would sell for $1,020. Bonds Payable

21. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-21 Mortgage Bonds Convertible Bonds Junk Bonds Debenture Bonds Types of Bonds

22. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-22 On January 1, 2003, Rocket Corp. issues $1,500,000 of 12%, 10-year bonds payable. Interest is payable semiannually, each July 1 and January 1. Assume the bonds are issued at face value. Record the issuance of the bonds. On January 1, 2003, Rocket Corp. issues $1,500,000 of 12%, 10-year bonds payable. Interest is payable semiannually, each July 1 and January 1. Assume the bonds are issued at face value. Record the issuance of the bonds. Accounting for Bonds Payable

23. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-23 Record the interest payment on July 1, 2003. Accounting for Bonds Payable

24. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-24 The selling price of the bond is determined by the market rate of interest = > < > < = Bond Prices

25. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-25 Gains or losses incurred as a result of retiring bonds should be reported as extraordinary items on the income statement. Early Retirement of Debt

26. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-26 Amount... Potential obligation depends on a future event arising out of a past transaction or event. Contingent Liabilities

27. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-27 Amount... Requires a credit to a contingent liability account and a debit to an estimated loss or expense account. Contingent Liabilities

28. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-28 Amount... Does not require a journal entry. Contingent Liabilities

29. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 10-29 Amount... Contingent Liabilities