Upload
flora-houston
View
213
Download
0
Embed Size (px)
Citation preview
Accounting for Liabilities
Chapter 7
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
7-2
Learning Objective 1
Show how notes payable and related interest expense affect financial statements.
7-3
Accounting for Notes Payable
= +
Cash = Notes Pay. + Int. Pay. +
Com. Stk. + Ret. Earn. Revenue - Expenses =
Net Income
Cash Flow
90,000 = 90,000 + n/a + n/a + n/a n/a - n/a = n/a 90,000 FA
Assets Liab. Stockholders' Equity
09/01/12 Borrowing
On September 1, 2012 Herrera Supply Company (HSC) borrowed $90,000 from the National Bank. HSC issued a note payable due in one year with an annual interest rate of 9%.
7-4
Accrual of Interest Expense
Assets = +
Cash = Notes Pay. + Int. Pay. + Com. Stk. + Ret. Earn. Revenue - Expenses =
Net Income Cash Flow
n/a = n/a + 2,700 + n/a + (2,700) n/a - 2,700 = (2,700) n/a
Stockholders' EquityLiabilities
12/31/12 Recognition of Interest Expense
At the end of 2012, HSC must accrue interest on its note payable.
$90,000 $90,000 × 9% × 4/12 = $2,700 interest × 9% × 4/12 = $2,700 interest expenseexpense
$90,000 $90,000 × 9% × 4/12 = $2,700 interest × 9% × 4/12 = $2,700 interest expenseexpense
7-5
Paying principal & interest at maturity date
Assets = +
Cash = Notes Pay. + Int. Pay. + Com. Stk. + Ret. Earn. Revenue - Expenses =
Net Income Cash Flow
n/a = n/a + 5,400 + n/a + (5,400) n/a - 5,400 = (5,400) n/a
Stockholders' EquityLiabilities
Assets = +
Cash = Notes Pay. + Int. Pay. + Com. Stk. + Ret. Earn. Revenue - Expenses =
Net Income Cash Flow
(8,100) = n/a + (8,100) + n/a + n/a n/a - n/a = n/a (8,100) OA (90,000) = (90,000) + n/a + n/a + n/a n/a - n/a = n/a (90,000) FA
Stockholders' EquityLiabilities
08/31/13 Recognition of interest expense. Payment of principal and interest on the maturity date, August 31, 2013. $90,000 $90,000 × 9% × 8/12 = $5,400 interest × 9% × 8/12 = $5,400 interest
expenseexpense$90,000 $90,000 × 9% × 8/12 = $5,400 interest × 9% × 8/12 = $5,400 interest
expenseexpense
Now, record payment of principal and interest payable.
7-6
Learning Objective 2
Show how sales tax liabilities affect financial statements.
7-7
Accounting for Sales Tax
Assets = Liabilities +
Cash = Sales Tax
Pay + Com. Stk. + Ret. Earn. Revenue - Expenses =
Net Income Cash Flow
2,120 = 120 + n/a + 2,000 2,000 - n/a = 2,000 2,120 OA
Stockholders' Equity
Most states require retail companies to collect sales tax on items sold to their customers. The retailer then remits the tax to the state at regular intervals. Sales tax is a liability to the retailer until paid to the state.
HSC sells merchandise to a customer for $2,000 cash in a state where the sales tax rate is 6%.
7-8
Accounting for Sales Tax
Assets = Liabilities +
Cash = Sales Tax
Pay + Com.
Stk. + Ret. Earn. Revenue - Expenses =
Net Income
Cash Flow
(120) = (120) + n/a + n/a n/a - n/a = n/a (120) OA
Stockholders' Equity
Remitting the tax (paying cash to the state tax authority) is an asset use transaction.
7-9
Learning Objective 3
Define contingent liabilities and explain how they are reported in financial statements.
7-10
Reporting Contingent Liabilities
7-11
Learning Objective 4
Explain how warranty obligations affect financial statements.
7-12
Warranty Obligations
= Liab. + Equity
Cash + Inventory = + Ret. Earn. Rev. - Exp. = Net
Income Cash Flow
7,000 + n/a = n/a + 7,000 7,000 - n/a = 7,000 7,000 OA
n/a + (4,000) = n/a + (4,000) n/a - 4,000 = (4,000) n/a
Assets
To attract customers, many companies guarantee their products or services. Within the warranty period, the seller promises to replace or repair defective products without charge.Event 1 Sale of MerchandiseHSC sells $7,000 of merchandise for cash. The merchandise had a cost of $4,000.
7-13
Warranty Obligations
Assets = Liabilities + Equity
= Warr. Pay + Ret. Earn. Revenue - Expenses = Net
Income Cash Flow n/a = 100 + (100) n/a - 100 = (100) n/a
Event 2 Recognition of Warranty ExpenseHSC estimates that warranty expense associated with the current sale will be $100.
7-14
Warranty Obligations
Assets = Liabilities + Equity
Cash = Warr. Pay + Ret. Earn. Revenue - Expenses = Net
Income Cash Flow (40) = (40) + n/a n/a - n/a = n/a (40) OA
Event 3 Settlement of Warranty ObligationHSC pays $40 cash to repair defective merchandise returned by a customer.
7-15
Financial Statements
Assets Cash 8,960$ Inventory 2,000 Total Assets 10,960$
Liabilities Warranties Payable 60 Stockholders' Equity Common Stock 5,000 Retained Earnings 5,900 Total Liab. & Stockholders' Equity 10,960$
Balance Sheet
Operating Activities Inflow from Customers 7,000$ Outflows for Warranty (40) Net Inflows From Oper. 6,960 Investing Activities 0Financing Activities 0 Beginning Cash Balance 2,000
Ending Cash Balance 8,960$
Statement of Cash Flows
Sales Revenue 7,000$ Cost of Goods Sold (4,000) Gross Margin 3,000 Warranty Expense (100) Net Income 2,900$
Income Statement
7-16
Learning Objective 5
Show how installment notes affect financial statements.
7-17
Long-term installment notes are liabilities that usuallyhave terms from two to five years.
Long-term installment notes are liabilities that usuallyhave terms from two to five years.
Each payment covers interest for the period and a
portion of the principal.
Each payment covers interest for the period and a
portion of the principal.
As payments are made, the amount allocated to
interest gets smaller and to principal gets
larger.
As payments are made, the amount allocated to
interest gets smaller and to principal gets
larger.
Principal
Company Lender
Payments
Installment Notes Payable
7-18
Applying payments to principal and interest
1. Identify the unpaid principal balance.
2. Amount applied to interest = Unpaid principal balance (1) × Interest rate.
3. Amount applied to principal = Cash payment less the amount applied to interest (2).
4. New unpaid principal balance = Unpaid principal balance (1) less the amount applied to principal (3).
Applying payments to principal and interest
1. Identify the unpaid principal balance.
2. Amount applied to interest = Unpaid principal balance (1) × Interest rate.
3. Amount applied to principal = Cash payment less the amount applied to interest (2).
4. New unpaid principal balance = Unpaid principal balance (1) less the amount applied to principal (3).
Installment Notes Payable
7-19
On January 1, 2012, Blair Company issued a $100,000 face value installment note to National Bank. The note had a 9 percent annual interest rate and a five year term. The loan agreement called for five equal
payments of $25,709 to be made on December 31 of each year.
Prepare an amortization table for Blair’s note.
On January 1, 2012, Blair Company issued a $100,000 face value installment note to National Bank. The note had a 9 percent annual interest rate and a five year term. The loan agreement called for five equal
payments of $25,709 to be made on December 31 of each year.
Prepare an amortization table for Blair’s note.
Installment Notes Payable
7-20Installment Notes PayableCash payment determined using present valueconcepts presented in a later chapter.Cash payment determined using present valueconcepts presented in a later chapter.
All computations rounded to the nearest dollar; after the 2016 payment the loan balance is 0.
Accounting Period
Unpaid Principal
Balance on January 1
Cash Payment on
December 31
Amount Applied to
Interest
Amount Applied to Principal
2012 100,000$ 25,709$ 9,000$ 16,709$ 2013 83,291 25,709 7,496 18,213 2014 65,078 25,709 5,857 19,852 2015 45,226 25,709 4,070 21,639 2016 23,587 25,710 2,123 23,587
7-21
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Year 1 Year 2 Year 3 Year 4 Year 5
Interest
Principal
With each payment the amount applied to the principal increases and the amount applied to
interest decreases.
With each payment the amount applied to the principal increases and the amount applied to
interest decreases.
Annual payments
are constant.
Installment Notes Payable
7-22
Installment Notes Payable
Assets = Liabilities +
Cash = Note Pay. + Com. Stk. + Ret. Earn. Revenue - Expenses = Net
Income Cash Flow 100,000 = 100,000 + n/a + n/a n/a - n/a = n/a 100,000 FA
Equity
Issuing the note has the following effecton Blair’s 2012 financial statements:Issuing the note has the following effecton Blair’s 2012 financial statements:
The December 2012 cash payment has the followingeffect on Blair’s 2012 financial statements:The December 2012 cash payment has the followingeffect on Blair’s 2012 financial statements:
Assets = Liab. +
Cash = Notes Pay. +
Com. Stk. + Ret. Earn. Rev. - Exp. =
Net Income Cash Flow
(25,709) = (16,709) + n/a + (9,000) n/a - 9,000 = (9,000) (9,000) OA
(16,709) FA
Equity
7-23
Learning Objective 6
Show how a line of credit affects financial statements.
7-24
Line of CreditLines of credit are
pre-approved financing plans
that allow companies to
borrow and repay funds as needed
up to the maximum credit line set by the
creditor.
Lines of credit are pre-approved
financing plans that allow
companies to borrow and repay funds as needed
up to the maximum credit line set by the
creditor.
Lines of credit are normally
used forrelatively short-term borrowing
tofinance seasonal business needs.
Lines of credit are normally
used forrelatively short-term borrowing
tofinance seasonal business needs.
7-25
Line of CreditLagoon Company borrows money using a line of credit to finance building up its inventory. Lagoon repays the loan over the summer using cash generated from sales. (Interest rates generally fluctuate based on a designated interest rate benchmark.)
Each borrowing is an asset source transaction. Each repayment is an asset use transaction.
7-26
Learning Objective 7
Explain how to account for bonds issued at face value and their related interest costs.
7-27
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Mason Company issues bonds on January 1, 2012.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2016 (5 years)
Mason Company issues bonds on January 1, 2012.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2016 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at Face Value
7-28Bonds Issued at Face Value
Event 1 Issue Bonds for CashIssuing the bonds has the following effect on Mason’s 2012 financial statements:
Event 1 Issue Bonds for CashIssuing the bonds has the following effect on Mason’s 2012 financial statements:
Assets = Liabilities + Equity
Cash = Bonds
Pay. + Revenue - Expenses = Net
Income Cash Flow
100,000 = 100,000 + n/a n/a - n/a = n/a 100,000 FA
Event 2 Investment in LandPaying $100,000 cash to purchase land is an asset exchange transaction.
Event 2 Investment in LandPaying $100,000 cash to purchase land is an asset exchange transaction.
Assets = Liabilities + Equity
Cash Land + Revenue - Expenses = Net
Income
Cash Flow
(100,000) + 100,000 = n/a n/a n/a - n/a = n/a (100,000) IA
7-29Bonds Issued at Face Value
Event 3 Revenue RecognitionRecognizing $12,000 cash revenue from renting the property is an asset source transaction.
Event 3 Revenue RecognitionRecognizing $12,000 cash revenue from renting the property is an asset source transaction.
Assets = Liabilities + Equity
Cash = + Ret. Earn. Revenue - Expenses = Net
Income Cash Flow (9,000) = n/a + (9,000) n/a - 9,000 = (9,000) (9,000) OA
Event 4 Expense RecognitionMason’s $9,000 ($100,000 x 0.09) cash payment in each of the 5 years represents interest expense.
Event 4 Expense RecognitionMason’s $9,000 ($100,000 x 0.09) cash payment in each of the 5 years represents interest expense.
Assets = Liabilities + Equity
Cash = + Ret. Earn. Revenue - Expenses =
Net Income
Cash Flow
12,000 = n/a + 12,000 12,000 - n/a = 12,000 12,000 OA
7-30Bonds Issued at Face Value
Bond Interest Payments
Mason Company
Investors
On each yearly interest payment date, Mason Company will pay $9,000 in interest. The amount is computed as follows:
On each yearly interest payment date, Mason Company will pay $9,000 in interest. The amount is computed as follows:
$100, 000 × 9% = $9,000 $100, 000 × 9% = $9,000
7-31
Bonds Issued at Face Value
Event 6 Payoff of Bond LiabilityThe principal repayment on December 31, 2016 will have thefollowing effect on Mason’s 2016 financial statements:
Event 6 Payoff of Bond LiabilityThe principal repayment on December 31, 2016 will have thefollowing effect on Mason’s 2016 financial statements:
Assets = Liabilities + Equity
Cash = Bonds Pay. + Revenue - Expenses = Net
Income Cash Flow (100,000) = (100,000) + n/a n/a - n/a = n/a (100,000) FA
Assets = Liabilities + Equity
Cash Land + Revenue - Expenses = Net
Income
Cash Flow
100,000 + (100,000) = n/a n/a n/a - n/a = n/a 100,000 IA
Event 5 Sale of Investment in LandSelling the land for cash equal to its $100,000 book value is an asset exchange transaction.
Event 5 Sale of Investment in LandSelling the land for cash equal to its $100,000 book value is an asset exchange transaction.
7-32Bonds Issued at Face Value
Bond Principal
at Maturity Date
Mason Company
Investors
On December 31, 2016, Mason Company will return the $100,000 principal amount to the
investors.
On December 31, 2016, Mason Company will return the $100,000 principal amount to the
investors.
7-33
7-34
Learning Objective 8
Use the straight-line method to amortize bond discounts and premiums.
7-35
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Mason Company issues bonds on January 1, 2012.Principal = $100,000Issued at 95 instead of face; cash proceeds of $95,000Stated Interest Rate = 9%Interest Date = 12/31
Maturity Date = Dec. 31, 2016 (5 years)
Mason Company issues bonds on January 1, 2012.Principal = $100,000Issued at 95 instead of face; cash proceeds of $95,000Stated Interest Rate = 9%Interest Date = 12/31
Maturity Date = Dec. 31, 2016 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at a Discount
7-36
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
$100,000 face issued at 95:
Bonds Payable $100,000
Less: Discount on Bonds Payable (5,000)
Carrying Value $ 95,000
$100,000 face issued at 95:
Bonds Payable $100,000
Less: Discount on Bonds Payable (5,000)
Carrying Value $ 95,000
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at a Discount
7-37Bonds Issued at a Discount
Expense Recognition for Bond issued at 95Mason’s cash payment is $9,000 ($100,000 x 0.09) Amortization of the discount of $5,000 over 5 years is $1,000 per year.Interest expense recognized is $9,000 plus $1,000 = $10,000
Expense Recognition for Bond issued at 95Mason’s cash payment is $9,000 ($100,000 x 0.09) Amortization of the discount of $5,000 over 5 years is $1,000 per year.Interest expense recognized is $9,000 plus $1,000 = $10,000
Cash =
Carrying Value of
Bond Liability + Ret. Earn. Revenue - Expenses =
Net Income
Cash Flow
(9,000) = 1,000 + (10,000) n/a - 10,000 = (10,000) (9,000) OA
7-38
7-39
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Mason Company issues bonds on January 1, 2012.Principal = $100,000Issued at 105 instead of face, cash proceeds of $105,000Stated Interest Rate = 9%Interest Date = 12/31
Maturity Date = Dec. 31, 2016 (5 years)
Mason Company issues bonds on January 1, 2012.Principal = $100,000Issued at 105 instead of face, cash proceeds of $105,000Stated Interest Rate = 9%Interest Date = 12/31
Maturity Date = Dec. 31, 2016 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at a Premium
7-40
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
$100,000 face issued at 105:
Bonds Payable $100,000
Plus: Premium on Bonds Payable 5,000
Carrying Value $ 105,000
$100,000 face issued at 105:
Bonds Payable $100,000
Plus: Premium on Bonds Payable 5,000
Carrying Value $ 105,000
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at a Premium
7-41Bonds Issued at a Premium
Expense Recognition for Bond issued at 105Mason’s cash payment is $9,000 ($100,000 x 0.09) Amortization of the premium of $5,000 over 5 years is $1,000 per year.Interest expense recognized is $9,000 less $1,000 = $8,000
Expense Recognition for Bond issued at 105Mason’s cash payment is $9,000 ($100,000 x 0.09) Amortization of the premium of $5,000 over 5 years is $1,000 per year.Interest expense recognized is $9,000 less $1,000 = $8,000
Cash =
Carrying Value of
Bond Liability + Ret. Earn. Revenue - Expenses =
Net Income
Cash Flow
(9,000) = (1,000) + (8,000) n/a - 8,000 = (8,000) (9,000) OA
7-42
Learning Objective 9
Distinguish between current and noncurrent assets and liabilities.
7-43
Current Versus Noncurrent
Current assets are expected to be converted to cash or consumed within one year or an
operating cycle, whichever is longer. Current assets include:
•Cash•Marketable Securities•Accounts Receivable•Short-Term Notes Receivable•Interest Receivable•Inventory•Supplies•Prepaid Items
•Cash•Marketable Securities•Accounts Receivable•Short-Term Notes Receivable•Interest Receivable•Inventory•Supplies•Prepaid Items
7-44
Current Versus Noncurrent
Current liabilities are due within one year or an operating cycle, whichever is longer. Current
liabilities, also called short-term liabilities, include:
•Accounts PayableAccounts Payable•Short-Term Notes PayableShort-Term Notes Payable•Wages PayableWages Payable•Taxes PayableTaxes Payable•Interest PayableInterest Payable
•Accounts PayableAccounts Payable•Short-Term Notes PayableShort-Term Notes Payable•Wages PayableWages Payable•Taxes PayableTaxes Payable•Interest PayableInterest Payable
7-45
Learning Objective 10
Prepare a classified balance sheet.
7-46
7-47
Learning Objective 11
Use the effective interest rate method to amortize bond discounts and premiums (Appendix).
7-48
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Mason Company issues bonds on January 1, 2012.Principal = $100,000Issued at 95 instead of face; cash proceeds of $95,000Stated Interest Rate = 9%Interest Date = 12/31
Maturity Date = Dec. 31, 2016 (5 years)
Mason Company issues bonds on January 1, 2012.Principal = $100,000Issued at 95 instead of face; cash proceeds of $95,000Stated Interest Rate = 9%Interest Date = 12/31
Maturity Date = Dec. 31, 2016 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at a Discount
7-49
Bonds Issued At A Discount – Effective Interest Rate
MethodInterest paid in cash each year is
$9,000.The effective interest rate method is
based on the market rate of interest on the day of issue and results in:o varying amount of interest expenseo related and varying addition to the
carrying value of the bonds each year.
7-50
Amortization Schedule for Bond Discount
7-51
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Mason Company issues bonds on January 1, 2011.Principal = $100,000Stated Interest Rate = 9%Interest Date = 12/31Maturity Date = Dec. 31, 2015 (5 years)
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
United Company issues bond with face value of $100,000Issued price is $107,985Stated Interest Rate = 10%; Effective rate of interest = 8%Interest Date = 12/31
Term of bond is 5 years
United Company issues bond with face value of $100,000Issued price is $107,985Stated Interest Rate = 10%; Effective rate of interest = 8%Interest Date = 12/31
Term of bond is 5 years
Bond Certificateat Face Value
Bond Certificateat Face Value
Bond Selling Price
Mason Company
Investors
Bonds Issued at a Premium
7-52
Amortization Schedule for Bond Premium
7-53Effective Interest Rate Method to Amortize the
Premium.
See Exhibit 7.14. Cash of $10,000 is paid for interest. Interest expense of $8,639 is recognized and $1,361 is subtracted from the carrying value of the bond liability
See Exhibit 7.14. Cash of $10,000 is paid for interest. Interest expense of $8,639 is recognized and $1,361 is subtracted from the carrying value of the bond liability
7-54
End of Chapter Seven