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