ch.9 current liabilities and time value of money
TRANSCRIPT
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Ch.9Ch.9Current LiabilitiesCurrent Liabilities
andandTime Value of MoneyTime Value of Money
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Part I: Current LiabilitiesPart I: Current Liabilities• Current liabilities:
– Require payment within one year (or one operating cycle whichever is longer)
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Liabilities and shareholders' equityCurrent liabilities:
Notes payable $ 21.1 Current maturities of long-term debt 3.9
Trade accounts payable 123.7Income taxes payable 18.3Accrued expenses and other
current liabilities 134.4Total current liabilities $301.4
Jacuzzi BrandsJacuzzi BrandsPartial Balance Sheet Partial Balance Sheet –– 2004 2004
(in millions)
Requires payment within
one year
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Selected 2004 Liquidity RatiosSelected 2004 Liquidity RatiosCurrentRatio
Jacuzzi Brands 1.79Sara Lee 1.06Tommy Hilfiger 3.87Boeing 0.72Nike 2.50
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LO1
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1. Accounts Payable1. Accounts Payable
Amounts owed for the purchase of inventory, goods, or services on credit
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2. Note Payable (Short term)2. Note Payable (Short term)
S.J.Devona
I promise to pay $1,000 plus 12% annualinterest on December 31, 2007.
Date: January 1, 2007
Signed:_________Lamanski Co.
Total repayment = $1,120 $1,000 + ($1,000 × 12%)
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Discounted Promissory NoteDiscounted Promissory Note
In exchange for $880 received today, I promise to pay $1,000 on December 31, 2007.
Date: January 1, 2007
Signed:_________Lamanski Co.
Effective interest rate on note = 13.6% ($120 interest/$880 proceeds)
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3. Current Maturities of Long-Term 3. Current Maturities of Long-Term DebtDebt
Principal repayment on borrowings due within one year of balance sheet date
Due in upcoming year
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25 26 28 29 30 3127
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4. Income Taxes Payable4. Income Taxes PayableRecord expense when incurred, not
when paid
Record 2007 taxexpense
Taxes Paid
12/31/07 3/15/08
LO2
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5. Contingent Liabilities5. Contingent Liabilities
Obligation involving existing condition Outcome not known with
certainty Dependent upon some
future event Actual amount is
estimated
LO4
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Accrue estimated amount if:• Liability is probable
• Amount can be reasonably estimated
Contingent LiabilitiesContingent Liabilities
In year criteria are met: Expense (loss) XXX
Liability XXX
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Warranties
Premium or coupon offers
Lawsuits
Typical Contingent LiabilitiesTypical Contingent Liabilities
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Recording Contingent LiabilitiesRecording Contingent Liabilities
Quickkey Computer sells a computer product for $5,000 with a one-year warranty. In 2007, 100 computers were sold for a total sales revenue of $500,000. Analyzing past records, Quickkey estimates that repairs will average 2% of total sales.
Example:
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Recording Contingent LiabilitiesRecording Contingent Liabilities
Probable liability has been incurred?
Amount reasonably estimable?
Warranty Expense 10,000 Estimated Liability 10,000
YES
YES
Record in 2007:
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Disclosing Contingent LiabilitiesDisclosing Contingent Liabilities
IF not probable
but reasonably possible
ORamount not estimable
Disclose in financial statement
notes
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Contingent AssetsContingent Assets Contingent gains and assets are not
recorded but may be disclosed in financial statement notes
Conservatism principle applies
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Part II: Time Value of MoneyPart II: Time Value of Money Prefer payment at the present time rather
than in the future due to the interest factor
Present and future value concepts allow people to compare the value of money at different point in time
Applicable to both personal and business decisions
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• If you invest $100 now at 10% annual return. How much money would you have in your account after 100 years?
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Simple v. compounding Simple v. compounding interestinterest
• Simple interest: earn interest only on the principal
• Compounding interest: earn interest on both principal and the interest earned in previous periods
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Simple InterestSimple Interest
I = P × R × T
Princip
al
Dollar
amou
nt of
inter
est p
er ye
ar
Time i
n year
s
Inter
est r
ate a
s a p
erce
ntage
LO5
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Simple Interest
principal amount = $ 100annual interest rate = 10%term of note = 100 years
P × R × TInterest = $100 × .10 × 100 = $ 1,000
Total = $100 + $1,000 = $1,100
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Compound InterestCompound Interest Interest is calculated on principal plus previously
accumulated interest• Interest on interest
Compound interest amount always higher than simple interest due to interest on interest
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Interest Compounding
principal amount = $ 100
annual interest rate = 10%
term of note = 100 years
Annual compounding of interest
LO6
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• Total amount after $100 years:
100(1+.1)(1+.1)(1+.1)(1+.1)(1+.1)…
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Compound Interest ComputationsCompound Interest Computations
Present value of an
annuity
Future value of an
annuity
Present value of a
single amount
Future value of a
single amount
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1. Future Value of Single Amount
Known amount of single payment or
investment Future Value
+ Interest =
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Future Value of a Single Amount Future Value of a Single Amount ExampleExample
If you invest $10,000 today @ 10% compound interest,
what will it be worth 3 years from now? invest
$10,000Future
Value = ?
+ Interest @ 10% per year
Year 1 Year 2 Year 3
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Future Value of a Single Amount Future Value of a Single Amount Example Example –– Using Formulas Using Formulas
FV = p(1 + i)n
= $10,000(1.10)3
= $13,310
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FV = Present value × table factor = $10,000 × (3 periods @ 10%)
Future Value of a Single Amount Future Value of a Single Amount Example Example –– Using Tables Using Tables
FV = ??PV = $10,000
Year 1 Year 2 Year 3
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(n) 2% 4% 6% 8% 10% 12% 15% 1 1.020 1.040 1.060 1.080 1.100 1.120 1.150 2 1.040 1.082 1.124 1.166 1.210 1.254 1.323 3 1.061 1.125 1.191 1.260 1.331 1.405 1.5214 1.082 1.170 1.262 1.360 1.464 1.574 1.749
5 1.104 1.217 1.338 1.470 1.611 1.762 2.011 6 1.126 1.265 1.419 1.587 1.772 1.974 2.313 7 1.149 1.316 1.504 1.714 1.949 2.211 2.660 8 1.172 1.369 1.594 1.851 2.144 2.476 3.059
Future Value of $1Future Value of $1
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FV = Present value × table factor = $10,000 × (3 periods @ 10%) = $10,000 × 1.331 = $13,310
Future Value of a Single Amount Future Value of a Single Amount Example Example –– Using Tables Using Tables
PV = $10,000
Yr. 1 Yr. 2 Yr. 3
FV = $13,310
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2. Present Value of Single Amount
Discount
Known amount of single
payment in futurePresent Value
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Present Value of a Single Amount Present Value of a Single Amount ExampleExample
If you will receive $10,000 in three years, what is it worth today (assuming you could invest at 10% compound interest)?
$10,000
Discount @ 10%
Year 1 Year 2 Year 3
Present Value = ?
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Present Value of a Single Amount Present Value of a Single Amount Example Example –– Using Formulas Using Formulas
PV = Future value × (1 + i)–n
= $10,000 × (1.10)–3
= $7,513
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PV = Future value × table factor = $10,000 × (3 periods @ 10%)
Present Value of a Single Amount Present Value of a Single Amount Example Example –– Using Tables Using Tables
FV = $10,000PV = ??
Year 1 Year 2 Year 3
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(n) 2% 4% 6% 8% 10% 12% 15% 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870 2 0.961 0.925 0.890 0.857 0.826 0.797 0.756 3 0.942 0.889 0.840 0.794 0.751 0.712 0.6584 0.924 0.855 0.792 0.735 0.683 0.636 0.572
5 0.906 0.822 0.747 0.681 0.621 0.567 0.497 6 0.888 0.790 0.705 0.630 0.564 0.507 0.432 7 0.871 0.760 0.665 0.583 0.513 0.452 0.376 8 0.853 0.731 0.627 0.540 0.467 0.404 0.327
Present Value of $1Present Value of $1
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PV = Future value × table factor = $10,000 × (3 periods @ 10%) = $10,000 × 0.751 = $7,510
Present Value of a Single Amount Present Value of a Single Amount Example Example –– Using Tables Using Tables
PV = $7,510
Yr. 1 Yr. 2 Yr. 3
FV = $10,000
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PracticePractice• If Johnson Company promises to pay
you $10,000,000 eight years from now, how much that promised payment worth now if the appropriate interest rate is 12%?
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Periods
FutureValue = ?
+ Interest
3. Future Value of an Annuity
1 2 3 4
$0 $3,000 $3,000 $3,000 $3,000
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If we invest $3,000 each year for four years at 10% compound interest, what will it be worth 4 years from now?
Future Value of an Annuity ExampleFuture Value of an Annuity Example
$0 $3,000 $3,000 $3,000 $3,000
Year 1 Year 2 Year 3 Year 4
FV = ??
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$0 $3,000 $3,000 $3,000 $3,000
Year 1 Year 2 Year 3 Year 4
FV = ??
Future Value of an Annuity ExampleFuture Value of an Annuity Example
FV = Payment × table factor = $3,000 × (4 periods @ 10%)
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(n) 2% 4% 6% 8% 10% 12% 15% 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2 2.020 2.040 2.060 2.080 2.100 2.120 2.150 3 3.060 3.122 3.184 3.246 3.310 3.374 3.4734 4.122 4.246 4.375 4.506 4.641 4.779 4.993
5 5.204 5.416 5.637 5.867 6.105 6.353 6.742 6 6.308 6.633 6.975 7.336 7.716 8.115 8.754 7 7.434 7.898 8.394 8.923 9.487 10.089 11.067 8 8.583 9.214 9.897 10.637 11.436 12.300 13.727
Future Value of Annuity of $1Future Value of Annuity of $1
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Future Value of an Annuity ExampleFuture Value of an Annuity Example
$0 $3,000 $3,000 $3,000 $3,000
Year 1 Year 2 Year 3 Year 4
FV = $13,923PV = Payment × table factor = $3,000 × (4 periods @ 10%) = $3,000 × 4.641 = $13,923
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4. Present Value of an Annuity4. Present Value of an Annuity
1 2 3 4
$0 $500 $500 $500 $500
Periods
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Discount
PresentValue = ?
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What is the value today of receiving $4,000 at the end of the next 4 years, assuming you can invest at 10% compound annual interest?
Present Value of an Annuity Present Value of an Annuity ExampleExample
$0 $4,000 $4,000 $4,000 $4,000
Year 1 Year 2 Year 3 Year 4
PV = ??
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$0 $4,000 $4,000 $4,000 $4,000
Year 1 Year 2 Year 3 Year 4
PV = ??
Present Value of an Annuity Present Value of an Annuity ExampleExample
PV = Payment × table factor = $4,000 × (4 periods @ 10%)
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(n) 2% 4% 6% 8% 10% 12% 15% 1 0.980 0.962 0.943 0.926 0.909 0.893 0.870 2 1.942 1.886 1.833 1.783 1.736 1.690 1.626 3 2.884 2.775 2.673 2.577 2.487 2.402 2.2834 3.808 3.630 3.465 3.312 3.170 3.037 2.855
5 4.713 4.452 4.212 3.993 3.791 3.605 3.352 6 5.601 5.242 4.917 4.623 4.355 4.111 3.784 7 6.472 6.002 5.582 5.206 4.868 4.564 4.160 8 7.325 6.733 6.210 5.747 5.335 4.968 4.487
Present Value of Annuity of $1Present Value of Annuity of $1
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Present Value of an Annuity Present Value of an Annuity ExampleExample
$0 $4,000 $4,000 $4,000 $4,000
Year 1 Year 2 Year 3 Year 4
PV = $12,680PV = Payment × table factor = $4,000 × (4 periods @ 10%) = $4,000 × 3.170 = $12,680
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PracticePractice• If Johnson Company promises to pay
you $1,000,000 each and every year for eight years, how much that promised payments worth now if the appropriate interest rate is 12%?
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PracticePractice• If Johnson Company promises to pay
you $10,000,000 eight years from now and $1,000,000 each year for eight years, how much would you be willing to pay for those promises if the appropriate interest rate is 12%?
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Appendix AAppendix A(FYI only)(FYI only)
Accounting Tools: Accounting Tools: Payroll Accounting Payroll Accounting
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Calculation of Gross WagesCalculation of Gross Wages Hourly
• Multiply the number of hours worked times employee’s hourly rate
Salaried• Paid at a flat rate per
week, month, or year, regardless of hours
LO8
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Calculation of Net PayCalculation of Net PayGross wagesLess: Income tax (federal, state, local) FICA—Employee’s share Voluntary deductions
(includes health insurance, retirement
contributions, savings plans, charitable
contributions, union dues, etc.)= Net pay
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Payroll AccountingPayroll Accounting
Example:
Gross wages for Kori Company for July are $100,000. The following amounts have been withheld from employees’ paychecks:
Income Tax $20,000FICA 7,650United Way Contributions 5,000Union Dues 3,000
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Payroll AccountingPayroll AccountingJournal entry:July 31 Salary Expense 100,000
Income Tax Payable 20,000FICA Payable 7,650United Way Payable 5,000Union Dues Payable
3,000Salary Payable 64,350
To record July salary and deductions.
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Employer Payroll TaxesEmployer Payroll Taxes Not deducted from paycheck –
employer pays taxes per employee, in addition to salary• FICA—Employer’s share• Unemployment tax
Assuming Kori Company’s unemployment tax rate is 3%.
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Employer payroll taxesEmployer payroll taxes
July 31 Payroll Tax Expense 10,650FICA Payable
7,650Unemployment Tax Payable
3,000To record employer’s payroll taxes.