CHAPTER 8 SUMMARY

Current &Long Term Liabilities

Current Liabilities

Obligations of an Organization that are due to be paid within one year or one accounting period (whichever is greater)

Recorded at: $ value of obligation Two Types:

$ value known $ value must be estimated

$ Value Known

Accounts Payable Amounts owed from purchases made on

account Other Payables

From Accrual process Salary Expense Interest Expense

Note Payable

Obligation we owe lender Includes both Principal & Interest Record 3 things:

Initial Obligation Periodic Interest Final Payoff

Warranty Payable

$ Value unknown Matching says…. Estimate Warranty Expense based on % of

expected warranty claims from sales Debit Warranty Expense Credit Warranty Payable

As the obligations for the warranties are fulfilled we reduce the liability Debit Warranty Payable Credit (it depends)

Cash (if we are giving customers back their $) Inventory (if we are giving customers replacement

products)

Bonds

Bond Payable is a long-term obligation

Similar to Notes Payable Record initial obligation Record periodic interest (semi-annually) Record final payoff

Bond Terminology Face Amount, Par value

Amount on Bond Document This is always the amount of the obligation that we owe the investors who

purchased the bond Amount Received

This is the cash $ we received from investors Bond interest rate, stated rate

The interest rate that is part of the bond contract This is the interest rate x the face amount of the bond that we will pay our

investors semi-annually – this is our obligation Market rate, effective interest rate

The prevailing interest rate an investor could earn in the “market” This is the interest rate x carrying bond amount, our interest expense (the cost

of borrowing the $) that we record on our income statements Carrying Bond Amount

Face Value of the bond – Discount on Bond Payable (a Contra-Liability account) or

Face Value of the bond + Premium on Bond Payable Amortizing Discount or Premium

Periodic reduction of Discount or Premium until bond matures Two Methods

Effective Interest Straight-Line

Bonds issued at Par

Record initial obligation Debit Cash Credit Bonds Payable

Record periodic Interest Debit Interest Expense Credit Cash (or Interest Payable)

Record final payoff Debit Bond Payable Credit Cash

Bonds Issued at a Discount Initial Obligation

Debit Cash Debit Discount on Bond Payable Credit Bonds Payable

Periodic Interest Interest Expense Credit Discount on Bond Payable Credit Cash or Interest Payable

Final Payoff Debit Bonds Payable Credit Cash

Bonds Issued at Premium

Initial Obligation Debit Cash Credit Premium on Bond Payable Credit Bond Payable

Periodic Interest Debit Interest Expense Debit Premium on Bond Payable Credit Cash (or Interest Payable)

Final Payoff Debit Bond Payable Credit Cash

Amortization Methods

Effective Interest Carrying Amount of

Bond x market rate % x 6 / 12 (when calculating for 6 months) Debit to Interest

Expense Face value of bond x

stated rate % x 6 /12 Credit Cash (Interest

payable) Difference is

amortization of premium or discount

Straight Line Determine Discount

or Premium Divide this amount

by term of Bond x # of payments per year (usually 2) Amortization amount

Journal Entry remains the same period to period

Times Interest Earned Ratio TIE = Operating Income / Interest

Expense Operating Income = Sales – CGS –

Operating Expenses