liabilities current liabilities: due in one year or less –types –ratios long-term liabilities:...
TRANSCRIPT
![Page 1: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/1.jpg)
Liabilities
• Current liabilities: due in one year or less– Types– Ratios
• Long-term liabilities: due in more than one year– Bonds– Capital leases versus operating leases
• Contingent liabilities: possible future liabilities
![Page 2: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/2.jpg)
Current Liabilities
• Interest payable• Unearned revenue• Sales tax payable• Payroll taxes payable
![Page 3: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/3.jpg)
Interest PayableAdjusting entry: accrued interest ($100 x 12% x 3/12)
Interest Expense 3
Interest Payable 3
N/P paid:
N/P 100
Interest Expense 9
Interest Payable 3
Cash 112
Interest payable is a
current liability
![Page 4: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/4.jpg)
Unearned RevenueWhen cash is received:
Cash 100
Unearned Revenue 100
When revenue earned:
Unearned Revenue 100
Revenue 100
Unearned
Revenue is a
current liability
![Page 5: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/5.jpg)
Sales Tax PayableSale: Coles County 6.25%
Cash 106.25
Sales (Revenue) 100
Sales Tax Payable 6.25
When sales tax paid to gov:
Sales Tax Payable 6.25
Cash 6.25
Sales tax not an expense for retailer
Why generally no sales tax on Internet purchases ???
Sales Tax payable is a
current liability
![Page 6: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/6.jpg)
Payroll Taxes Payable$400 Employee Wages
Wage expense 400.00
Federal income tax payable (W-4 exemptions, refund?)
46.00
State income tax payable (IL 3%; others 0 – 10%) 12.00
City income tax payable (generally larger cities, none in IL)
4.00
Social security tax payable (employee, 6.25% of $87,000)
25.00
Employee Medicare tax payable (employee, 1.45% of all)
5.80
Pension contribution payable (retire before 80, put max in)
24.00
Health insurance payable (generally dependents) 40.00
Cash (not much….) 243.20
![Page 7: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/7.jpg)
Social Security and Medicare Issues
• Depletion of social security funds– Social security payments
• 2 for 1– Live too long after retirement– Vote often
– Social security contributions• Not enough Gen X, Y, Z, etc.• Company matches your Social Security and Medicare
contributions– Self-employed and independent contractors
• Medicare funds– Health insurance for those collecting social
security
![Page 8: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/8.jpg)
CURRENT LIABILITY RATIOSShort-Term Creditors
RATIOS
CURRENT QUICK (ACID-TEST) WORKING CAPITAL
CA / CL CA – INV / CL CA - CL
> 2?? > 1??? > 0???
![Page 9: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/9.jpg)
Long-term liabilities
• Bonds• Capital leases
![Page 10: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/10.jpg)
BOND BASICS
IBM
$1,000 LOAN
Interest each year at coupon rate$1,000 at maturity
![Page 11: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/11.jpg)
Bond Values• Lend IBM $1,000 for 30 years @ 8%, two years
later rates on similar bonds decrease to 6%– Still receiving $80 per year for 28 more years
• PV of Annuity, 28 years, 6%– $80 x 13.4062 =$1,072.50
– Receiving $1,000 in 28 years• PV of $1, 28 years, 6%
– $1,000 x .1956 = $195.60
– Value of bond = PV of Int Annuity + PV of $1,000• $1,072.50 + $195.60 = $1,268.10
– 26.8% increase in bond value– If coupon rate > required rate of return, value of
bond will be > $1,000
![Page 12: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/12.jpg)
Bond Values
• Discount bond cash flows at required rate of return (yield to maturity)– Don’t use coupon rate– If you do, you’ll find value is $1,000
• Interest rates increase, bond values decrease• Interest rates decrease, bond values increase• Bonds are priced at a percent of par value
– 104, 98, etc.
![Page 13: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/13.jpg)
Bonds
• Advantages– Interest on bonds deducted as an expense
on tax return• Dividends on common stock: not an expense
– No dilution of stockholders’ interest
• Disadvantages– Failure to pay debt can result in bankruptcy– Dividends discretionary; interest is not
![Page 14: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/14.jpg)
Bond Journal EntriesWhen bonds are issued:
Cash 1000
Bonds Payable 1000
When interest is paid:
Interest expense 40
Cash 40
($1000 x 8% x 6/12)
![Page 15: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/15.jpg)
Leasing long-term assets
• Advantages of operating leases– No concern about residual value– Generally smaller down payment– Can deduct rent on tax return– Keeps liability off balance sheet
• However, should disclose lease commitments in footnotes
![Page 16: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/16.jpg)
Leasing long-term assets
• Capital leases– Lease property for most of its useful life– Can purchase the property for nominal
amount at end of lease– Lease payments represent financing– Treat as an asset and long-term liability
![Page 17: Liabilities Current liabilities: due in one year or less –Types –Ratios Long-term liabilities: due in more than one year –Bonds –Capital leases versus](https://reader035.vdocuments.us/reader035/viewer/2022062321/56649e175503460f94b031f5/html5/thumbnails/17.jpg)
Contingent liability
• Possible future liability– Either
• Amount of liability can not be reasonably determined
• Or not sure if liability exists
– Lawsuits, environmental issues, etc.– Generally disclose in footnotes