Ch8 - Liabilities and Stockholders Equity Chapter 8 Describe how businesses finance their operations Debt Current liabilities A/P S/T Notes Payable

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Liabilities and Stockholders’ Equity Chapter 8
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Describe how businesses finance their operations. Debt Current liabilities : A/P S/T Notes Payable Wages Payable Unearned fees Unearned rent Long-term liabilities: L/T Notes Payable Mortgage Payable Bonds Payable (interest expense costs) Equity Owners Investments Stocks ( more issued dilutes ownership of other shareholders Retained Earnings ( use cash to make purchases and reduce RE)
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Current liabilities: Arise from receiving goods or services prior to making payment. Purchase $100 supplies on account. Supplies 100 A/P 100 Arise from receiving payment prior to delivering goods or services. Time Magazine received $350 in Magazine subscriptions for 2007 Cash $350 Unearned Subscription Revenue $350 Arise in the normal course of business: Employees work through end of month, which ends on Tuesday. Company will pay $12,000 wages owed on Friday (which is next period/month). Wages Expense 12,000 Wages Payable 12,000
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Arise from Contingent Liabilities Amounts the business will owe in the future if certain events occur. Record the liability only if: The future event is probable, and The amount owed is reasonably estimable . Example : Morgan Corporation sold goods for $200,000 with a warranty. It is probable that some of these goods will need repair during the warranty period, and Morgan can estimate the cost of repairs: Its historical repair costs are 3% of sales. The Matching Concept requires that Morgan match the repairs expense with the revenue it helped generate, so Morgan records the liability: $200,000 x .03 = $6,000 + Product Warranty Expense $6,000 + Product Warranty Payable $6,000
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Bonds Bonds: are another form of an interest-bearing note similar to notes payable. Corporations that issue bonds, enter into a contract called a bond-indenture. The face-value (principle) of each bond is usually $1,000 or multiples thereof. Interest (also called contract rate or coupon rate of interest) is generally paid semiannually for the life of the bond. The principle is paid back upon maturity (unlike notes where the interest and principle are paid at the same time).
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On 4-15-06, Morgan Corp. issued at face-value $3,500,000 of 20- year, 8% bonds for cash with interest payable semi-annually. Assets = Liabilities + Equity Cash 3,500,000 = Bonds Payable 3,500,000 Bond Terms : Total Face value = $3,500,000 Contract or coupon rate of interest = 8% Term of bonds = 20 years or 40 semi-annual periods
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Bond Semi-annual interest payments are calculated by: P x IR x T = ($3,500,000 x .08 x 1/2) = $140,000 On 10-15 and 4-15 every year (semi-annually), Morgan pays $140,000 interest:
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This note was uploaded on 02/22/2011 for the course ACCOUNTING 200 taught by Professor Valadez during the Spring '08 term at University of Tennessee.

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Ch8 - Liabilities and Stockholders Equity Chapter 8 Describe how businesses finance their operations Debt Current liabilities A/P S/T Notes Payable

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