Chapter 8



Chapter 10

Reporting and Analyzing Liabilities

• Liabilities are defined as creditors claims on total assets and existing debt obligations

o Current vs. Long-Term

o A current liability is a debt that can reasonably be expected to be paid from existing current assets or through the creation of other current liabilities, and within 1 year or the operating cycle, whichever is longer

o If the definition above is not met, then the liability is classified as a long-term liability (an obligation expected to be paid after 1 year)

• Accounting for Notes Payable, page 475

• Accounting for Other Current Liabilities, pages 476-478

o New Accounts:

▪ Sales Taxes Payable

▪ Salaries and Wages Expense

▪ FICA Taxes Payable (Social Security Taxes)

▪ Federal Income Taxes Payable

▪ State Income Taxes Payable

▪ Salaries and Wages Payable

▪ Payroll Tax Expense

▪ Federal Unemployment Taxes Payable

▪ State Unemployment Taxes Payable

o Don’t Forget: Unearned Revenue is a liability

• Bonds are a form of interest-bearing note payable issued by corporations, universities, and governmental agencies

o Bond advantages vs. Stock Issuance, Ill 11-21, page 558

o Secured vs. Unsecured; Convertible vs. Callable, etc.

o There is an inverse relationship between bond prices and interest rates

o Face or Par Value, Stated Interest Rate, Maturity Date, Coupons

o Time Value of Money is used to compute bond prices

o A Discount Bond sells below par; A Premium Bond sells above par

o If market rates are higher than the bonds stated rate, it’s a discount bond

o If market rates are lower than the bonds stated rate, it’s a premium bond

• Journalizing Bonds:

o Face-Value Bonds, page 484

o Discount Bonds, page 485 & 499

o Premium Bonds, page 487 & 500

o Bond Retirement, page 488

o Early Retirement (Callable Bonds), page 489

• Note Presentation of Long-Term Liabilities, Ill. 10-15, page 490

• Ratios: Working Capital, Current Ratio, Quick (Acid-Test) Ratio, Debt to Assets, Times Interest Earned (TIE)

• Contingent Liabilities – are events with uncertain outcomes, pages 494-495

o Accounting rules require that contingencies be disclosed in the notes

o A contingency must be recorded in the financial statements if the company can determine a reasonable estimate of the expected loss and if it is probable it will lose the suit.

• HOMEWORK:

o Brief Exercises: 1, 5, 6, 7, 8

o Exercises: 4, 5, 18, 19

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