Chapter 10 – Reporting and analysing liabilities



Chapter 10 – Reporting and analysing liabilities Current liabilities ?What is a current liability?Company expects to pay the debt from existing current assets or through the creation of other current liabilitiesCompany will pay the debt within one year or the operating cycle, whichever is longer. ??Note: current liablities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages and interest ??Notes payableWritten promissory noteUsually require the borrower to pay interest Those due within one year of the balance sheet date are usually classified as current liabilities?Sales tax payable (equivalent to VAT)Sales taxes are expressed as a sate % of the sales priceSelling companyCollects tax from the customerRemits the collections to the state's department of revenue ?Unearned revenue Revenue that are received before the company delivers goods or provides services Company debits cash and credits a current liability account When the company earns revenue, it debits the unearned revenue account and credits a revenue account ?Current maturities of long-term debtPortion of long-term debt that comes due in the current year No adjusting entry required ?Bond: long-term liabilities?Bonds are a form of interest-bearing notes payable issued by corporations, universities and governmental agencies. Sold in small denominations (usually 1000 or multiples)When a corporation issues bonds, it is borrowing money. The person who buys the bonds (the bondholder) is investing in bonds?Types of bonds Secured Unsecured Convertible Callable ?Issuing procedures ?Bond certificate Issued to the investorProvides name of the company issuing bonds, face value maturity date and contractual interest rateFace value Principal due at the maturity Maturity date Date final payment is due Contractual interest rate Rate to determine cash interest paid generally semi-annually ?Determining the market value of bonds ?The current market price (present value) of a bond is a function of 3 factors: The dollar amounts to be received The length of time until the amounts are received The market rate of interest ?The process of finding the present value is referred to as discounting the future amounts ?Accounting for bond issues ?A corporation records bond transactions when itIssues or retires (buys back) bonds and When bondholders convert bonds into common stock Bonds may be issued at Face valueBelow face value (discount) or Above face value (premium)Bond prices are quoted as a percentage of face value ??Issuing bonds at a discount ?Sale of bonds below face value causes the total cost of borrowing to be more than the bond interest paid The reason: borrower is required to pay the bond discount at the maturity date. Thus the bond discount is considered to be an increase in the cost of borrowing ?Issuing bonds at a premium Sales of bonds above face value causes the total cost of borrowing to be less than the bond interest paid. The reason: the borrower is not required to pay the bond premium at the maturity date of the bonds. Thus, the bond premium is considered to be a reduction in the cost of borrowing ??Accounting for bond retirements ?Redeeming bonds at maturity ?When a company retires bonds before maturity, it is necessary to Eliminate the carrying value of the bonds at the redemption dateRecord the cash paid Recognize the gain or loss on redemption?Note: the carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date???Financial statement analysis and presentation ?Liquidity ratios: measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash Solvency: measure the ability of a company to survive over a long period of time ? ................
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