Lecture Accounting: What the numbers mean (5/e) - Chapter 7: Accounting for and presentation of liabilities

After reading this chapter, you should be able to answer the following questions: What is the financial statement presentation of short-term debt and current maturities of long-term debt? What is the difference between interest calculated on a straight basis and on a discount basis? What are unearned revenues and how are they presented in the balance sheet?...

Learning Objectives

1. What is the financial statement

presentation of short-term debt and

current maturities of long-term debt?

2. What is the difference between

interest calculated on a straight basis and on a discount basis?

3. What are unearned revenues and

Learning Objectives

4. What is the accounting for

employer’s liability for payroll and payroll taxes?

5. What is the importance of making

estimates for certain accrued liabilities and how are these items presented in the balance sheet?

6. What is leverage and how is it

provided by long-term debt?

7. What are the different

characteristics of a bond?

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Learning Objectives

8. Why does bond discount or premium

arise and how is it accounted for?

9. What are deferred income taxes and

why do they arise?

10. What is minority interest, why does it

arise, and what does it mean in the

balance sheet?

Learning Objective 1

• What is the financial statement

presentation of short-term debt

and current maturities of

long-term debt?

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Current Liabilities

• Amounts due within one year or

operating cycle

• A working capital loan is a short-term

loan with the expectation that it will be

repaid from the collection of accounts

receivable generated by the sale of

inventory

• A revolving line of credit is a

predetermined maximum amount, but

Notes Payable

• A note is a formal promise to pay a

stated amount at a stated date, usually

Learning Objective 2

interest calculated on a straight

basis and on a discount basis?

Interest Calculation Methods

• Straight interest is calculated as follows:

Interest = Principal X Rate X Time (in years)

• A discount is interest that is subtracted from the loan principal and the borrower receives the difference

• The difference received by the borrower is

called the proceeds

• The discounted amount is shown in the

balance sheet as a contra liability

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Current Maturities of

Long-Term Debt

• The portion of long-term borrowing

that must be repaid within a year of

the balance sheet date is reported as

a current liability

• The remainder of the long-term debt

is shown in noncurrent liabilities

Accounts Payable

• Accounts payable are amounts owed to

suppliers for goods and services that have been provided to the entity on credit

• May be reported using either the gross or

the net method

• The gross method recognizes cash

discounts when the invoices are paid within the discount period

• The net method recognizes cash discounts when purchases are made

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Learning Objective 3

and how are they presented in

the balance sheet?

Unearned Revenues or

Deferred Credits

pay for goods or services before the goods or

services are delivered:

revenues is removed and recorded as

revenues:

Unearned revenue XX

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Learning Objective 4

liability for payroll and payroll taxes?

Payroll Taxes and Other Withholdings

• Gross pay is wages earned by

an employee

• Net pay is the amount the employee

receives after deductions

• Deductions include federal income tax,

state income tax, FICA withholding,

union dues, and many others

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Liabilities from Withholdings

• Amounts withheld are liabilities to the

employer until paid

• Additional liabilities result since

employers are subject to federal and

state payroll taxes

• These payroll taxes are an expense to

Other Accrued Liabilities

• There are many other liabilities that

are accrued by entities

– Accrued property taxes

– Estimated warranty liabilities

– Accrued interest – if not reported

separately

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Learning Objective 5

estimates for certain accrued

liabilities and how are these

items presented in the balance

sheet?

Presentation of Accrued Liabilities

• Estimates of accrued liabilities are

presented on the balance sheet as current liabilities since they are due within one year

of the balance sheet date

• These estimated items are originally

recorded as increases in expenses and

increases in liabilities

• Adjustments are made to the liabilities as

the actual cost is determined

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Learning Objective 6

provided by long-term debt?

Noncurrent Liabilities

• Capital structure is the mix of debt and

owners’ equity used to finance the

acquisition of the firm’s assets

• Using long-term debt has the

advantage of having interest expense

being deductible – whereas dividends

on stock are not deductible

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Financial Leverage

• Financial leverage is the difference

between the rate of return earned on

assets (ROI) and the rate of return

earned on owners’ equity (ROE)

• A firm can borrow money to purchase

assets and use those assets to earn a

rate of return greater than the interest

Learning Objective 7

• What are the different characteristics

of a bond?

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Bonds Payable

• Most long-term debt is issued in the

form of bonds

• A bond is a formal debt document

usually issued in denominations of

$1,000

• Bond prices are expressed as a

Learning Objective 8

premium arise and how is it accounted for?

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Bond Premiums and

Bond Discounts

• A bond premium is the excess of a

bond’s market value over its face

amount

• A bond discount is the excess of the

face amount over the market value of

the bond

• Premiums and discounts usually result

Reporting Bonds – At Par

Reporting Bonds – At Discount

Reporting Bonds – At Premium

Types of Bonds

• Callable bonds – the issuer may payoff

the bonds before the scheduled maturity date

• Registered bonds – the name and

address of the bond owner is known to

the issuer

• Coupon bonds – the owner is not known

to the issuer

More Types of Bonds

• Mortgage bonds – secured by a lien

against real estate owned by the issuer

• Term bonds – requires a lump-sum

payment of the face amount of the

bonds at maturity

• Serial bonds – repaid in installments

• Convertible bonds – may be converted

into stock of the issuer corporation at

the option of the bondholder

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Learning Objective 9

and why do they arise?

Deferred Tax Liabilities

• Deferred tax liabilities are provided for

temporary differences between income tax

and financial statement recognition of

revenues and expenses

• Normally are long-term liabilities

related to depreciation expense

• The deferred tax liability is the difference

between income tax expense and income

tax payable

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Other Noncurrent Liabilities

• Obligations related to pension plans

are noncurrent liabilities

• Obligations related to post-retirement

benefits

• Estimated liability under lawsuits in

progress also may be listed as

noncurrent liabilities

Learning Objective 10

it arise, and what does it mean in

the balance sheet?

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Minority Interest in Subsidiaries

• A subsidiary is a corporation that is more than 50% owned by the firm for which

financial statements have been prepared

• The resulting financial statements are

called consolidated financial statements

• Minority interest arises if the subsidiary is not 100% owned by the parent corporation