Phillips Chap 10 Slide Show

Phillips Chap 10 Slide Show - Classification of Liabilities...

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Unformatted text preview: Classification of Liabilities Current Liabilities Long-Term Liabilities Due within one year or the company’s operating cycle, whichever is longer. Due after one year or the company’s operating cycle, whichever is longer. The amount reported for liabilities results from: 1.The initial amount of the liabilities. A liability is recorded at its cash equivalent, which is the amount of cash that a creditor would accept to settle the liability immediately. 2.Additional amounts owed to the creditor. Liabilities are increased whenever additional obligations arise, including interest charges. 3.Payments or services provided to the creditor. Liabilities are reduced whenever the company makes payments or provides services to the creditor. Current Liabilities A/P – Purchase of goods/services on credit A/P Accrued Liabilities – An expense is incurred in one accounting period, the cash payment in a later period in N/P – company borrows money from another Sales Tax Payable – Liability resulting when a company collects sales tax for the state company Unearned Revenue – The receipt of cash before goods or services are provided. before Payroll Taxes FICA Medicare Taxes Federal Income Taxes State & Local Income Taxes Voluntary Deductions Jcorp June Payroll Salaries and wages earned by employees Less: Income taxes withheld from employees Less: FICE taxes withheld from employees Net pay to employees $ 1,000,000 152,780 58,000 $ 789,220 Compensation expense (+E, -SE) Liability for income taxes withheld (+L) FICA taxes withheld (+L) Cash (-A) Compensation expense (+E, -SE) FICA payable (+L) 1,000,000 152,780 58,000 789,220 58,000 58,000 Exh. 9.3 Matrix borrows $200,000 from National PROMISSORY NOTE $200,000 Face Value One Year after date Sept. 30, 2006 Date I promise to pay to the order of National Bank, Boston, MA Two hundred thousand and no/100---------------------- Dollars plus interest at the annual rate of 12% . Janet Smith, CFO For Matrix, Inc. On September 30, 2006 what entry would Matrix make ? Accounts Cash (+A) Notes payable (+L) 9/30/06 Note Issues 12/31/06 Year End Debit 200,000 Credit 200,000 9/30/07 Note Due What entry would be made on December 31, 2006, the year-end for Matrix? Interest = Principal × Rate × Time Interest Interest = $200,000 × 12% × 3/12 Accounts Interest expense (+E, -SE) I nterest payable (+L) Debit 6,000 Credit 6,000 What entry does Matrix make when it pays the interest and principal on Sept 30, 2007 ? $24,000 = $200,000 × 12% × 12/12 Accounts Interest expense (+E, -SE) Interest payable (-L) Cash (-A) Note payable (-L) Cash (-A) Debit 18,000 6,000 Credit 24,000 200,000 200,000 Sales Tax Payable Frank’s Sporting Goods sells a raft for Frank’s $750 and collects the required 6% sales tax for the state. tax Accounts Cash (+A) Sales tax payable (+L) Sales revenue (+R, +SE) Debit Credit 795 45 750 Unearned Revenues On June 10, 2006, Excel Catering received $1,500 in advance for catering a party on July 4, 2006. Accounts Cash (+A) Unearned revenue (+L) Debit 1,500 Credit 1,500 Unearned Revenues Excel finished catering the party on July 4, 2006, and makes the following entry. Accounts Unearned revenue (-L) Catering revenue (+R, +SE) Debit 1,500 Credit 1,500 Long-term Liabilities Two Ways to Obtain Corporate Financing Private Placement Publicly Issued Debt (1) Find a Lender (2) Set Loan Terms (3) Borrow Money (Notes Payable) (1) Set Loan Terms (2) Find Lenders (3) Borrow Money (Bonds Payable) Bond Interest Rates Stated Rate (Nominal Rate) Market Rate (Yield) (Discount Rate) Used to determine Used cash interest payments payments Used to determine Used the bond liability and interest expense interest Bond Issuing Price Stated Rate = Market Rate Face Value Stated Rate < Market Rate Discount Stated Rate > Market Rate Premium Bond Issued Below or Above Face Value What lenders expects What lenders think What lenders pay 4% Market Rate Wow, I’ll pay extra Premium 6% Stated Rate What lenders expects What lenders think What lenders pay 6% Market Rate It’s just enough Face Value What lenders expects What lenders think What lenders pay 8% Market Rate I’m not attracted (yet) Discount Issuing Bonds at Face Amount Prepare the entry for Jan. 1, 2006, to record the following bond issue by Matrix, Inc. Par Value = $10,000,000 Stated Interest Rate = 10% Interest Date = December 31 Bond Date = Jan. 1, 2006 Maturity Date = Dec. 31, 2008 (3 years) Issuing Bonds at Face Amount 1/1/06 Bonds Issued $10,000,000 Received 12/31/06 Interest Paid 12/31/07 Interest Paid 12/31/08 Interest Paid $10,000,000 Repaid Interest Face Amount $10,000,000 × 10% × 12/12 = $1,000,000 Issuing Bonds at Face Amount On January 1, 2006, the bonds are On issued to the public and the following journal entry is made: journal Accounts Cash (+A) Bonds payable (+L) Debit 10,000,000 Credit 10,000,000 On December 31, 2006, the first annual interest payment is due. interest Accounts Interest expense (+E, -SE) Cash (-A) Debit Credit 1,000,000 1,000,000 At maturity on December 31, 2008, the final interest payment is made and the principal amount is repaid. and Accounts Interest expense (+E, -SE) Cash (-A) Accounts Bonds payable (-L) Cash (-A) Debit 1,000,000 Debit 10,000,000 Credit 1,000,000 Credit 10,000,000 Bonds Issued at a Discount On Jan. 1, 2006, Matrix, Inc. issues these bonds: Par Value = $10,000,000 Issue Price = 95.198% of par value Stated Interest Rate = 10% Market Interest Rate = 12% Interest Dates = December 31 Bond Date = January 1, 2006 Maturity Date = December 31, 2008 (3 years) Issuing Bonds at a Discount Face Value Cash Pro Discount $10,000,000 - $ 9,519,800 = $ 480,200 $10,000,000 × 95.198% Debit Credit Cash (+A) 9,519,800 Discount on bonds payable (+xL) 480,200 Bonds payable (+L) 10,000,000 Accounts Partial Balance Sheet as of Jan. 1, 2006 Long-term Liabilities: Bonds Payable $ 10,000,000 Less: Discount on Bonds Payable 480,200 $ 9,519,800 Maturity Value Maturity Carrying Value Bond Amortization Schedule Year 1 2 3 Int Exp 1,142,376 1,159,461 1,178,363 Discount C Value 9,519,800 1,000,000 142,376 9,662,176 1,000,000 159,461 9,821,637 1,000,000 178,363 10000000 Cash Int What entry is made on Dec 31, 2006, to record the first annual interest payment due to the bondholders ? payment Accounts Interest expense (+E, -SE) Discount on bonds payable (-xL) Cash (-A) Debit 1,142,376 Credit 142,376 1,000,000 Partial Balance Sheet as of December 31, 2006 Long-term Liabilities: Bonds Payable $ 10,000,000 Less: Discount on Bonds Payable 337,824 $ 9,662,176 $480,200 - $142,376 = $337,824 $480,200 Bonds Issued at a Premium On January 1, 2006, Matrix, Inc. issues these bonds: Par Value = $10,000,000 Issue Price = 105.15419% of par value Stated Interest Rate = 10% Market Interest Rate = 8% Interest Dates = December 31, 2006 Bond Date = January 1, 2006 Maturity Date = December 31, 2008 (3 years) Cash Proceeds Face Value Premium $ 10,515,419 - $ 10,000,000 = $ 515,419 $10,000,000 × 105.15419% Accounts Cash (+A) Premium on bonds payable (+L) Bonds payable (+L) Debit 10,515,419 Credit 515,419 10,000,000 Bonds Issued at a Premium Partial Balance Sheet as of Jan. 1, 2006 Long-term Liabilities: Bonds Payable Add: Premium on Bonds Payable $ 10,000,000 515,419 $ 10,515,419 Maturity Value Maturity Carrying Value $10,515,419- -$841,234= =$158,766 $10,356,653 $1,000,000 $158,766=$841,234 $10,515,419 × 8% $10,515,419 What is the December 31, 2006 Entry to record the first annual interest Payment ? Payment Accounts Debit Credit Interest expense (+E, -SE) 841,234 Premium on bonds payable (-L) 158,766 Cash (-A) 1,000,000 Bonds Issued at a Premium Partial Balance Sheet as of December 31, 2006 Long-term Liabilities: Bonds Payable Less: Discount on Bonds Payable $ 10,000,000 356,653 $ 10,356,653 $515,419 - $158,766 = $356,653 $515,419 Early Retirement of Debt On Jan 1, 2006, Matrix, Inc. issues, at face value, On $10,000,000 of 3 year bonds payable. The bonds pay annual interest at 10% on Dec 31 of each year. On Dec 31, 2007, the company retires the bonds by purchasing them in the open market for a total cost of $10,300,000. them Accounts Interest expense (+E, -SE) Cash (-A) Accounts Bonds payable (-L) Loss on bonds retired (+E, -SE) Cash (-A) Debit 1,000,000 Debit 10,000,000 300,000 Credit 1,000,000 Credit 10,300,000 Current Current Ratio = Current Assets Current Liabilities Measures whether the company Measures has enough current assets to pay what it currently owes. what Times Interest Interest Earned Ratio = Net Income + Interest Exp + Inc Tax Exp Interest Expense This ratio shows the amount of resources generated for each dollar of interest expense. interest Common Features of Debt Loan Terms Security What They Mean Guarantees that the borrower's assets will be given to the creditor if the borrower doesn't pay. Loan Covenants Allows the creditor to force immediate repayment of the loan if the borrower violates these terms. Seniority Senior debt is paid first in the event of bankruptcy, followed by subordinated debt. Convertibility Gives the creditor an option to accept the borrower's stock as payment for the outstanding loan. Callability Gives the borrower control over the decision to fully repay the lender before the loan's maturity date. Effects Reduces risk to creditors, making them w illing to accept a lower interest rate. Reduces risk to creditors, making them w illing to accept a lower interest rate. Reduces risk to senior creditors making them willing to accept a lower interest rate. Gives greater control to creditors, reducing their risk and making them w illing to accept a lower interest rate. Gives greater control to borrowers, increasing creditors' risk and causing them to demand a higher interest rate. Contingent Liability Yes Probable No No Contingent Contingent liability Possible Possible Describe in notes Record a liability Remote Don’t mention it ...
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