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Debts of company proprietorships ownership rests with

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Unformatted text preview: asset – Asset value is fair value of asset – Lease obligation (liability) is present value of lease payments Record reduction in lease obligation each period Record interest expense each period Record amortization expense each period Pension Plans and Other Benefits Pension plans Other post retirement benefits – Example – Blue Cross, life insurance Employees earn the benefits while they work and receive the benefit when they retire Pension Plans Two types – Defined contribution pension plan Company pays a set contribution to plan – Defined benefit pension plan Employee is entitled to a set amount at retirement Defined Contribution Plan Company pays pension trustee Payment based on actuarial estimates Performance of pension plan determines payout to employees No future obligation for company Jessica Gahtan ACTG2011 Page 13 Final Notes Chapters 8- 12 Fall 2013 Defined Benefit Plan Company pays pension trustee Payment based on actuarial estimates Employee receives a set payout irrespective of performance of plan Company must make up any shortfall Company must record liability, if known Other Liabilities: Contingencies Liability or asset dependent on future event – Disclose liability unless remote probability – Never accrue contingent asset or gains – Disclose in notes to financial statements Probable but cannot be reasonably estimated Not likely to occur but significant/material Other Liabilities: Commitments A contractual agreement to enter into a transaction in the future – Executory contract- no recognition – Disclosure only Subsequent Events Type I – Events that occur after year end but provide information about circumstances that existed at year end Improve estimating capability Examples – Bankruptcy of customer – Results of a lawsuit – Reflect in estimates in year end statements Type II – Events unrelated to year end numbers – Disclose in notes to financial statements where significant effect Debt and taxes Interest expense is deductible when calculating taxable income After- tax cost of borrowing = Stated interest rate X (1- tax rate) Example: – If stated interest rate is 11.5% and tax rate is 40% then after- tax cost of borrowing = 11.5% X(1- .40) = 11.5 X .6 = 6.9% Jessica Gahtan ACTG2011 Page 14 Final Notes Chapters 8- 12 Fall 2013 Financial Statement Analysis Debt- to- equity ratio = Total liabilities Total Shareholders’ equity Measures risk to lenders Can only be analyzed in context Industry Nature of assets and liabilities Interest coverage ratio = Net income + interest expense Interest expense Measur...
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