ACCT final study guide - LECTURE 16 Accounting for...

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LECTURE 16: Accounting for Liabilities - current liabilities (due within one year) are shown in nominal terms rather than PV - classification of notes payable (current or long-term) depends on maturity date o to reclassify from long-term to current (when due within one year), debit long-term debt and credit current portion of long-term debt - accrued interest is typically a current liability - if firm intends to refinance on long-term basis (bonds), the current amount is excluded from current liabilities - sales tax does not impact the income statement because it is neither an income or expense of the company – the company collects sales ta from its customers and then pays the amount collected to the sales tax authorities (when it collects sales tax, it reports it as a liability, since the amount is now owed to sales tax authorities) - journal entry for sales o debit cash (business is receiving cash) o credit sales revenue for amount before tax o credit sales tax payable for amount of tax - journal entry for paying tax to government o credit cash o debit sales tax payable - journal entry for earning income that will be income taxed o debit income tax expense o credit income tax payable - warranties: matching principle requires that expense and sale are in same period - estimate warranty costs based on historical and projected warranty claim rates: o debit warranty expense o credit warranty payable - warranty expenditures satisfy warranty claims: o debit warranty payable o credit cash or inventory (refund vs. replaced product) - warranties may be purchased on their own: revenue is deferred and recognized over the life of the contract (unearned revenue) - debentures = unsecured bonds (not backed by some collateral) - covenants = contractual restrictions on borrower’s actions o restricts dividend payments, working capital requirements, etc. o may require “sinking fund” (cash or securities set aside for repayment) - callable bond = issuer can repay early (government/corp. repays investor) - convertible bond = holder can exchange for preset number of stock shares - 3 basic journal entries for bonds o to record issue: debit cash and credit long-term debt o to record interest payment: credit cash and debit interest expense o to record principle payment at maturity: credit cash and debit LT debt - amount of the initial liability recorded for LT debt represents PV of all future cash payments associated with the debt o this is the price and book value of the debt o this amount can change over time
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o can be more or less than face value LECTURE 17: Accounting for Long-Term Debt, Issuance of Bonds - mortgages = notes or bonds secured by real estate - notes payable and bonds are accounted for similarly, except that notes payable are to a single creditor and typically for a shorter duration than bonds - term bonds mature on a single date, while serial bonds mature in installments - current portion due is a current liability, unless it will not require use of current assets (refinancing) -
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