LIABILITIES Chapter 10

I.O.U. Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or lessMaturity > 1 year Current Liabilities Noncurrent Liabilities The Nature of Liabilities

Key features of a current liability: It is expected to be paid from existing current assets or through the creation of other current liabilities It will be paid within one year or the operating cycle, whichever is longer. TYPES OF CURRENT LIABILITIES Notes Payable Accounts Payable Unearned Revenues Accrued Liabilities

Total Notes Payable Current Notes Payable Noncurrent Notes Payable When a company borrows money, a note payable is created. Current Portion of Notes Payable The portion of a note payable that is due within one year, or one operating cycle, whichever is longer. When a company borrows money, a note payable is created. Current Portion of Notes Payable The portion of a note payable that is due within one year, or one operating cycle, whichever is longer. Current Liabilities Notes Payable

NOTES PAYABLE Key features of a note payable : Promissory note Interest Notes due within a year are current liabilities

ตั๋วเงินจ่าย – ตั๋วเงินจ่ายการค้า – ตั๋วเงินจ่ายอื่น ตั๋วเงินจ่าย – ตั๋วเงินระบุดอกเบี้ย – ตั๋วเงินไม่ระบุดอกเบี้ย NOTES PAYABLE

Assume First National Bank agrees to lend $100,000 on March 1, 20X1, if Cole Williams Co. 12%, 4-month note. DateAccount TitlesDebitCredit General Journal March 1 Cash 100,000 Notes Payable 100,000 NOTES PAYABLE- ระบุดอกเบี้ย ISSUANCE DATE NOTES PAYABLE- ระบุดอกเบี้ย ISSUANCE DATE Assets received = face value of note

$100,000 x 12% x 4/12 = $4,000 Face Value of Note Annual Interest Rate Time in Terms of One Year Interest Using the Cole Williams Co. data: INTEREST FORMULA If the loan term is expressed in days, use the number of days divided by 365. If loan term is expressed in months, use the number of months divided by 12.

If Cole Williams Co. prepares financial statements semiannually, an adjusting entry is required to recognize interest expense and interest payable of $4,000 at June 30. DateAccount TitlesDebitCredit General Journal June 30 Interest Expense 4,000 Interest Payable 4,000 NOTES PAYABLE - ระบุดอกเบี้ย INTEREST ACCRUAL NOTES PAYABLE - ระบุดอกเบี้ย INTEREST ACCRUAL

DateAccount TitlesDebitCredit General Journal July 1 Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 NOTES PAYABLE - ระบุดอกเบี้ย MATURITY DATE NOTES PAYABLE - ระบุดอกเบี้ย MATURITY DATE When the loan is paid, the FACE VALUE is debited, any interest accrued is removed, and cash is decreased by this combined amount.

Assume First National Bank agrees to lend $100,000 on March 1, 20X1, 4-month note. NOTES PAYABLE- ไม่ระบุดอกเบี้ย ISSUANCE DATE NOTES PAYABLE- ไม่ระบุดอกเบี้ย ISSUANCE DATE General Journal DateAccount TitlesDebitCredit March 1Cash96,000 Notes Payable Discount ( ส่วนลดในตั๋วเงิน จ่าย ) 4,000 Notes Payable 100,000

DateAccount TitlesDebitCredit General Journal July 1 Notes Payable 100,000 Cash 100,000 NOTES PAYABLE- ไม่ระบุดอกเบี้ย MATURITY DATE NOTES PAYABLE- ไม่ระบุดอกเบี้ย MATURITY DATE When the loan is paid, the FACE VALUE is debited,

Short-term obligations to suppliers for purchases of merchandise and to others for goods and services. Merchandise inventory invoices Shipping charges Utility and phone bills Office supplies invoices Current Liabilities Accounts Payable

Sales tax is expressed as a stated percentage of the sales price on goods sold to customers by a retailer. The retailer collects the tax from the customer when the sale occurs. Retailer periodically remits the collections to the state’s department of revenue. OTHER CURRENT LIABILITIES SALES TAXES PAYABLE OTHER CURRENT LIABILITIES SALES TAXES PAYABLE Retailer is a collection agent for the tax authority.

On March 25th cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600. DateAccount TitlesDebitCredit General Journal Mar. 25 Cash10,600 Sales 10,000 Sales Tax Payable 600 SALES TAXES PAYABLE SALE DATE SALES TAXES PAYABLE SALE DATE Sales tax rate = 6%

PAYROLL AND PAYROLL TAXES PAYABLE Liabilities relating to employee wages and salaries include: Wages and salaries payable Withholding taxes (to record payment of March 7 payroll) 90,000 Cash 90,000Salaries & Wages PayableMarch 11 (record payroll & w/h taxes for week of March 7) Salaries & Wages Payable 90,000 10, ,000Salaries & Wages ExpenseMarch 7 CreditDebitAccountDate Income Taxes Payable

Unearned Revenues occur when a company receives cash before a service is rendered. Examples: Airline sells a ticket for future flights Attorney receives legal fees before work is done. UNEARNED REVENUES

Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. DateAccount TitlesDebitCredit General Journal Aug. 6 Cash 500,000 Unearned Football Ticket Revenue 500,000 UNEARNED REVENUES CASH RECEIPT UNEARNED REVENUES CASH RECEIPT

As each game is completed, Unearned Football Ticket Revenue is debited for 1/5 of the unearned revenue. The earned revenue, Football Ticket Revenue, is credited. DateAccount TitlesDebitCredit General Journal Sept. 7 Unearned Football Ticket Revenue 100,000 Football Ticket Revenue 100,000 UNEARNED REVENUES EARNINGS DATE UNEARNED REVENUES EARNINGS DATE

That portion of long-term debt due within 1 year. Classified as a current liability on the balance sheet CURRENT MATURITIES OF LONG-TERM DEBT CURRENT MATURITIES OF LONG-TERM DEBT

เป็นภาระผูกพันที่ยังไม่ทราบจำนวนเงินและ ระยะเวลาที่ต้องจ่ายอย่าง แน่นอน ต้องประมาณการจำนวนค่าใช้จ่ายและตั้ง ประมาณการหนี้สิน ตัวอย่างหนี้สินจากการรับประกันคุณภาพสินค้า Dr. ค่าใช้จ่ายในการรับประกันคุณภาพสินค้า xx Cr. ประมาณการหนี้สินจากการรับประกัน คุณภาพสินค้า xx Contingency Liability( ประมาณการ หนี้สิน )

FINANCIAL STATEMENT PRESENTATION

A form of interest-bearing notes payable issued by corporations, universities, & governmental agencies. Can be sold in small denominations to attract many investors. Sold to obtain long term capital. An alternative to issuing stock. BONDS PAYABLE

ADVANTAGES OF BOND FINANCING OVER STOCK ADVANTAGES OF BOND FINANCING OVER STOCK

EFFECTS ON EPS BONDS VS. STOCK EFFECTS ON EPS BONDS VS. STOCK

TYPES OF BONDS Bond TypeDistinguishing characteristics SecuredBacked by specific assets UnsecuredBacked by credit of issuer (debentures) TermPaid at end of specified term SerialPaid in installments RegisteredIssued in name of specific holder BearerNot registered. (Coupon bonds) ConvertibleCan be converted to common stock CallableCan be retired before maturity

Corporate bonds are traded on securities exchanges. Bond prices are quoted as a percentage of the face value of the bond (usually $1,000). Transactions between a bondholder and other investors are not journalized by the issuing corporation. A corporation records entries when it issues/buys back bonds, and when bondholders convert bonds into stock. BOND ISSUANCE PROCEDURES

INTEREST RATES AND BOND PRICES BOND CONTRACTUAL INTEREST RATE 10% Issued when: 8% 10% 12% Premium Face Value Discount Market Rates Bonds Sell at:

ISSUING BONDS AT FACE VALUE ISSUING BONDS AT FACE VALUE Assume that Devor Corporation issues year, 9% $1,000 bonds dated January 1, 20x1, at 100 (100% of face value). The entry to record the sale is: (record sale of bonds at face value) 1,000,000 Bonds payable 1,000,000CashJan 1 CreditDebitAccountDate 1000 bonds x $1000 = $1,000,000

BOND INTEREST PAYMENT Assume that interest is payable semi-annually on January 1 and July 1. Next payment Is due July 1, 20x1. The entry is: (record semi-annual bond interest payment) 45,000 Cash 45,000Bond Interest ExpenseJuly 1 CreditDebitAccountDate $1,000,000 x 9% x 6/12 = $45,000

BOND INTEREST ACCRUAL Assume that interest is payable semi-annually on January 1 and July 1. Next payment Is due Jan 1, 20x2. At December 31, 20x1 the entry to accrue interest is: (record sale of bonds at face value) 45,000 Bond Interest Payable 45,000Bond Interest ExpenseDec 31 CreditDebitAccountDate $1,000,000 x 9% x 6/12 = $45,000

ISSUING BONDS AT A DISCOUNT On January 1, 20 x 1, Candlestick, Inc. sells $100,000, 5-year, 10% bonds for $92,639 with interest payable on payable on July 1 & January 1. The entry to record the issuance is: 100,000 Bonds Payable (record issuance of bonds at a discount) 7,361Discount on Bonds Payable 92,639CashJan 1 CreditDebitAccountDate Market value of bonds = $92,639

FINANCIAL STATEMENT PRESENTATION--DISCOUNT CANDLESTICK, INC. Balance Sheet (partial) Long-term liabilities Bonds payable $100,000 Less: Discount on Bond Payable $7,361 $92,639 Discount on Bonds Payable is a contra account, which is deducted from bonds payable on the balance sheet: Carrying value of bonds = $92,639

TOTAL COST OF BORROWING BONDS ISSUED AT A DISCOUNT The the discount is an additional cost of borrowing that is recorded as bond interest expense over the life of the bonds. The total cost of borrowing for Candlestick, Inc., is computed as follows: Semiannual Interest Payments Add: Bond Discount Total Cost of Borrowing Bonds Issued at a Discount xxx

ISSUING BONDS AT A PREMIUM On January 1, 20x1, Candlestick, Inc. sells $100,000, 5-year, 10% bonds for $108,111 with interest payable on payable on July 1 & January 1. The entry to record the issuance is: 100,000 Bonds Payable (record issuance of bonds at a premium) 8,111 Premium on Bonds Payable 108,111CashJan 1 CreditDebitAccountDate Market value of bonds = $108,111

FINANCIAL STATEMENT PRESENTATION—PREMIUM CANDLESTICK, INC. Balance Sheet (partial) Long-term liabilities Bonds payable $100,000 Add: Premium on Bonds Payable $8,111 $108,111 Premium on Bonds Payable is added to bonds payable on the balance sheet: Carrying value of bonds = $108,111

The premium is considered to be a reduction in the cost of borrowing that should be credited to Bond Interest Expense over the life of the bonds. Semiannual Interest Payments xx Less: Bond Premium xx Bonds Issued at a Premium TOTAL COST OF BORROWING BONDS ISSUED AT A PREMIUM Total Cost of Borrowing xx

TOTAL COST OF BORROWING BONDS ISSUED AT A PREMIUM กรณีดอกเบี้ยตามสัญญาไม่เท่ากับดอกเบี้ยใน ท้องตลาด (Effective interest rate) หุ้นกู้จะซื้อขาย ในราคาที่ต่ำกว่าหรือสูงกว่าราคาตามมูลค่า ส่วนต่ำหรือส่วนเกินมูลค่าหุ้นกู้ถือเป็นส่วนหนึ่ง ของดอกเบี้ยที่จะปรับดอกเบี้ยตามสัญญาให้ เท่ากับดอกเบี้ยในท้องตลาด วิธีตัดส่วนต่ำหรือส่วนเกินมูลค่าหุ้นกู้ – วิธีเส้นตรง (Straight-Line Method ) – วิธีอัตราดอกเบี้ยที่แท้จริง ( Effective interest Method ) การตัดส่วนต่ำและ ส่วนเกินมูลค่าหุ้นกู้

วิธีเส้นตรง ส่วนต่ำมูลค่าหุ้นกู้ตัดบัญชีต่องวด = 7,361÷ 5 = 1, เงินสดจ่ายดอกเบี้ยต่องวด = ราคาตาม มูลค่าของหุ้นกู้ x อัตราดอกเบี้ยตาม สัญญา = (100,000x10%x6/12) = 5,000 ดอกเบี้ยจ่ายต่องวด = 5, , = 6, การตัดส่วนต่ำมูลค่าหุ้นกู้

การบันทึกการจ่ายดอกเบี้ยและการตัดบัญชีส่วน ต่ำมูลค่าหุ้นกู้ในสมุดรายวันทั่วไป ณ วันจ่าย ดอกเบี้ย การตัดส่วนต่ำมูลค่าหุ้นกู้ DateAccountDebitCredit July 1 Interest Expense6, Discount on Bonds Payable 1, Cash5,000

วิธีดอกเบี้ยที่แท้จริง ดอกเบี้ยจ่ายสำหรับงวด = มูลค่าตามบัญชีของ หุ้นกู้ ณ วันต้นงวด x อัตราดอกเบี้ยในท้องตลาด ต่องวด เงินสดจ่ายดอกเบี้ยต่องวด = ราคาตามมูลค่าของ หุ้นกู้ x อัตราดอกเบี้ย ตามสัญญา ส่วนลดตัดบัญชี = ดอกเบี้ยจ่าย - เงิน สดจ่ายดอกเบี้ย การตัดส่วนต่ำมูลค่าหุ้นกู้

Date เงินสดจ่าย ดอกเบี้ย ดอกเบี้ย จ่าย 12%÷2 ส่วนลดตัด บัญชี ยอด คงเหลือใน บัญชีส่วน ต่ำมูลค่าหุ้น กู้ มูลค่าตาม บัญชี 7,36192,639 July 1,20x1 5,0005, , , Jan 1, 20x2 5,0005, , , July 1,20x2 5,0005, , , Jan 1, 20x3 5,0005, , , Jan 1, 20x5 5, ,000 การตัดส่วนต่ำมูลค่าหุ้นกู้

เช่นเดียวกับการตัดส่วนต่ำมูลค่าหุ้นกู้ ที่มีทั้งวิธี เส้นตรงและวิธีดอกเบี้ยที่แท้จริง โดยวิธีคำนวณ เหมือนกัน ต่างจากการตัดส่วนต่ำมูลค่าหุ้นกู้คือ ส่วนเกิน มูลค่าหุ้นกู้จะนำไปเพิ่มดอกเบี้ยจ่าย ( กระทำ ตรงข้ามกับการตัดส่วนต่ำมูลค่าหุ้นกู้ ) เงินสดจ่ายดอกเบี้ยต่องวด = ราคาตามมูลค่าของ หุ้นกู้ x อัตราดอกเบี้ยตามสัญญา ดอกเบี้ยจ่ายต่องวด = เงินสดจ่าย ดอกเบี้ย - ส่วนเกินตัดบัญชี การตัดส่วนเกินมูลค่าหุ้น กู้

Book value of the bonds at maturity will equal their face value. The entry to record the redemption of the Candlestick bonds at maturity is: REDEEMING BONDS AT MATURITY (record payment of bonds at maturity) 100,000 Cash 100,000Bonds PayableMaturity date CreditDebitAccountDate This assumes all interest has been paid to maturity. The entry will be the same regardless of whether The bonds were issued at face value, discount, or premium

Assume the bonds were sold at a premium. At the end of the eight interest period, Candlestick retires the bonds for $103,000. The entry to retire the bonds is: REDEEMING BONDS BEFORE MATURITY 1,377Loss on Bond Redemption 103,000 Cash (record redemption and loss prior to maturity) 1,623Premium on Bonds Payable 100,000Bonds PayableJan 1 CreditDebitAccountDate

CONVERTING BONDS TO COMMON STOCK Market prices of the bonds and the stock are ignored. The carrying value of the bonds is transferred to capital. No gain or loss is recognized. On July 1 Saunders Associates converts $100,000 bonds sold at face value into 2,000 shares of $10 par value common stock. Both the bonds and the common stock have a market value of $130,000. The entry to record the conversion is: 80,000 Paid in capital in excess of par (record bond conversion) 20,000 Common Stock 100,000Bonds PayableJuly 1 CreditDebitAccountDate

LONG-TERM NOTES PAYABLE Terms exceed one year. May be secured by a specific assets (mortgage). Mortgage N/P are recorded initially at face value. Subsequent entries required for installment payments. (B)(C)(D) Semiannual Interest Period (A) Cash Payment Interest Expense (D) x 6% Reduction Of Principal (A) – (B) Principal Balance (D) –(C) Issue date $500, ,231 $30,000 $3, ,769 2 $33,231 29,806 3, ,344 Porter Technology Inc. issues a $500,000, 12%, 20-year mortgage note on December 31, 20x1, to build a research lab. The terms provide for semiannual installment payment of $33,231. The installment payment schedule for the first year is shown below:

The entries to record the issuance and first interest payment are: LONG-TERM NOTES PAYABLE JOURNAL ENTRIES 33,231 Cash 30,000Interest ExpenseJune 30 3,231Mortgage Notes Payable (record mortgage loan) (record first installment payment) 500,000 Mortgage Notes Payable 500,000CashDec 31 CreditDebitAccountDate

PRESENTATION & ANALYSIS The long-term liabilities for LAX Corporation are shown below: LAX Corporation Balance Sheet (partial) Long-term liabilities Bonds payable 10% due in 2012 $1,000,000 Less: Discount on bonds payable 80,000$920,000 Mortgage notes payable, 11%, due in 2018 and secured by plant assets 500,000 Lease liability 540,000 Total long-term liabilities $1,960,000