LIABILITIES Chapter 10 2

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

TYPES OF CURRENT 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. Notes Payable Accounts Payable Unearned Revenues Accrued Liabilities 2

Current Liabilities 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. Total Notes Payable Current Notes Payable Noncurrent Notes Payable

ตั๋วเงินจ่าย NOTES PAYABLE ตั๋วเงินจ่ายการค้า ตั๋วเงินจ่ายอื่น ตั๋วเงินระบุดอกเบี้ย ตั๋วเงินไม่ระบุดอกเบี้ย

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

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. Using the Cole Williams Co. data: Annual Interest Rate Face Value of Note Time in Terms of One Year Interest $100,000 x 12% x 4/12 = $4,000

NOTES PAYABLE -ระบุดอกเบี้ย INTEREST ACCRUAL General Journal Date Account Titles Debit Credit June 30 Interest Expense 4,000 Interest Payable 4,000 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. 5

MATURITY DATE NOTES PAYABLE -ระบุดอกเบี้ย July 1 Notes Payable 100,000 General Journal Date Account Titles Debit Credit July 1 Notes Payable 100,000 Interest Payable 4,000 Cash 104,000 When the loan is paid, the FACE VALUE is debited, any interest accrued is removed, and cash is decreased by this combined amount. 6

NOTES PAYABLE-ไม่ระบุดอกเบี้ย Assume First National Bank agrees to ISSUANCE DATE General Journal Date Account Titles Debit Credit March 1 Cash 96,000 Notes Payable Discount (ส่วนลดในตั๋วเงินจ่าย) 4,000 Notes Payable 100,000 Assume First National Bank agrees to lend $100,000 on March 1, 20X1, 4-month note. 4

NOTES PAYABLE-ไม่ระบุดอกเบี้ย When the loan is paid, the FACE VALUE is MATURITY DATE General Journal Date Account Titles Debit Credit July 1 Notes Payable 100,000 Cash 100,000 Interest Expense 4,000 Notes Payable Discount 4,000 When the loan is paid, the FACE VALUE is debited, 6

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

OTHER CURRENT LIABILITIES SALES TAXES 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. Retailer is a collection agent for the tax authority. 7

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

PAYROLL AND PAYROLL TAXES PAYABLE Liabilities relating to employee wages and salaries include: Wages and salaries payable Withholding taxes Date Account Debit Credit March 7 Salaries & Wages Expense 100,000 Income Taxes Payable 10,000 Salaries & Wages Payable 90,000 (record payroll & w/h taxes for week of March 7) March 11 Salaries & Wages Payable 90,000 Cash 90,000 (to record payment of March 7 payroll)

UNEARNED REVENUES 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. 10

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

UNEARNED REVENUES EARNINGS DATE General Journal Date Account Titles Debit Credit Sept. 7 Unearned Football Ticket Revenue 100,000 Football Ticket Revenue 100,000 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. 12

That portion of long-term debt Classified as a current liability CURRENT MATURITIES OF LONG-TERM DEBT That portion of long-term debt due within 1 year. Classified as a current liability on the balance sheet 13

Contingency Liability(ประมาณการหนี้สิน) เป็นภาระผูกพันที่ยังไม่ทราบจำนวนเงินและระยะเวลาที่ต้องจ่ายอย่าง แน่นอน ต้องประมาณการจำนวนค่าใช้จ่ายและตั้งประมาณการหนี้สิน ตัวอย่างหนี้สินจากการรับประกันคุณภาพสินค้า Dr. ค่าใช้จ่ายในการรับประกันคุณภาพสินค้า xx Cr. ประมาณการหนี้สินจากการรับประกันคุณภาพสินค้า xx Dr. ประมาณการหนี้สินจากการรับประกันคุณภาพสินค้า xx Cr. เงินสด xx

FINANCIAL STATEMENT PRESENTATION 14

BONDS PAYABLE 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.

ADVANTAGES OF BOND FINANCING OVER STOCK

EFFECTS ON EPS BONDS VS. STOCK

BOND ISSUANCE PROCEDURES 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.

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

ISSUING BONDS AT FACE VALUE Assume that Devor Corporation issues 1000 10-year, 9% $1,000 bonds dated January 1, 20x1, at 100 (100% of face value). The entry to record the sale is: Date Account Debit Credit Jan 1 Cash 1,000,000 Bonds payable 1,000,000 (record sale of bonds at face value) 1000 bonds x $1000 = $1,000,000

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

BOND INTEREST ACCRUAL $1,000,000 x 9% x 6/12 = $45,000 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: Date Account Debit Credit Dec 31 Bond Interest Expense 45,000 Bond Interest Payable 45,000 (record sale of bonds at face value) $1,000,000 x 9% x 6/12 = $45,000

ISSUING BONDS AT A DISCOUNT On January 1, 20x1, 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: Date Account Debit Credit Jan 1 Cash 92,639 Discount on Bonds Payable 7,361 Bonds Payable 100,000 (record issuance of bonds at a discount) Market value of bonds = $92,639

FINANCIAL STATEMENT PRESENTATION--DISCOUNT Discount on Bonds Payable is a contra account, which is deducted from bonds payable on the balance sheet: CANDLESTICK, INC. Balance Sheet (partial) Long - term liabilities Bonds payable $100,000 Less: Discount on Bond Payable $7,361 $92,639 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: Bonds Issued at a Discount xxx Semiannual Interest Payments xxx Add: Bond Discount Total Cost of Borrowing 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: Date Account Debit Credit Jan 1 Cash 108,111 Premium on Bonds Payable 8,111 Bonds Payable 100,000 (record issuance of bonds at a premium) Market value of bonds = $108,111

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

TOTAL COST OF BORROWING BONDS ISSUED AT A PREMIUM 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. Bonds Issued at a Premium Semiannual Interest Payments xx Less: Bond Premium xx Total Cost of Borrowing xx

TOTAL COST OF BORROWING BONDS ISSUED AT A PREMIUM การตัดส่วนต่ำและส่วนเกินมูลค่าหุ้นกู้ TOTAL COST OF BORROWING BONDS ISSUED AT A PREMIUM กรณีดอกเบี้ยตามสัญญาไม่เท่ากับดอกเบี้ยในท้องตลาด(Effective interest rate) หุ้นกู้จะซื้อขายในราคาที่ต่ำกว่าหรือสูงกว่าราคาตามมูลค่า ส่วนต่ำหรือส่วนเกินมูลค่าหุ้นกู้ถือเป็นส่วนหนึ่งของดอกเบี้ยที่จะปรับดอกเบี้ยตามสัญญาให้เท่ากับดอกเบี้ยในท้องตลาด วิธีตัดส่วนต่ำหรือส่วนเกินมูลค่าหุ้นกู้ วิธีเส้นตรง(Straight-Line Method) วิธีอัตราดอกเบี้ยที่แท้จริง(Effective interest Method)

การตัดส่วนต่ำมูลค่าหุ้นกู้ วิธีเส้นตรง ส่วนต่ำมูลค่าหุ้นกู้ตัดบัญชีต่องวด = 7,361÷ 10 = 736 เงินสดจ่ายดอกเบี้ยต่องวด = ราคาตามมูลค่าของหุ้นกู้ x อัตราดอกเบี้ยตามสัญญา = (100,000x10%x6/12) = 5,000 ดอกเบี้ยจ่ายต่องวด = 5,000 + 736 = 5,736

การตัดส่วนต่ำมูลค่าหุ้นกู้ การบันทึกการจ่ายดอกเบี้ยและการตัดบัญชีส่วนต่ำมูลค่าหุ้นกู้ในสมุดรายวันทั่วไป ณ วันจ่ายดอกเบี้ย Date Account Debit Credit July 1 Interest Expense 5,736 Discount on Bonds Payable 736 Cash 5,000

การตัดส่วนต่ำมูลค่าหุ้นกู้ วิธีดอกเบี้ยที่แท้จริง ดอกเบี้ยจ่ายสำหรับงวด = มูลค่าตามบัญชีของหุ้นกู้ ณ วันต้นงวดx อัตราดอกเบี้ยในท้องตลาดต่องวด เงินสดจ่ายดอกเบี้ยต่องวด = ราคาตามมูลค่าของหุ้นกู้ x อัตราดอกเบี้ย ตามสัญญา ส่วนลดตัดบัญชี = ดอกเบี้ยจ่าย - เงินสดจ่ายดอกเบี้ย

การตัดส่วนต่ำมูลค่าหุ้นกู้ Date เงินสดจ่ายดอกเบี้ย ดอกเบี้ยจ่าย 12%÷2 ส่วนลดตัดบัญชี ยอดคงเหลือในบัญชีส่วนต่ำมูลค่าหุ้นกู้ มูลค่าตามบัญชี 7,361 92,639 July 1 ,20x1 5,000 5,558.34 558.34 6,802.66 93,197.34 Jan 1, 20x2 5,591.84 591.84 6,210.82 93,789.18 July 1 ,20x2 5,627.35 627.35 5,583.47 94,416.53 20x3 5,664.99 664.99 4,918.48 95,081.52 20x5 - 0 - 100,000

การตัดส่วนเกินมูลค่าหุ้นกู้ เช่นเดียวกับการตัดส่วนต่ำมูลค่าหุ้นกู้ ที่มีทั้งวิธีเส้นตรงและวิธีดอกเบี้ยที่แท้จริง โดยวิธีคำนวณเหมือนกัน ต่างจากการตัดส่วนต่ำมูลค่าหุ้นกู้คือ ส่วนเกินมูลค่าหุ้นกู้จะนำไปลดดอกเบี้ยที่จ่าย (กระทำตรงข้ามกับการตัดส่วนต่ำมูลค่าหุ้นกู้) เงินสดจ่ายดอกเบี้ยต่องวด = ราคาตามมูลค่าของหุ้นกู้ x อัตราดอกเบี้ยตามสัญญา ดอกเบี้ยจ่ายต่องวด = เงินสดจ่ายดอกเบี้ย - ส่วนเกินตัดบัญชี

REDEEMING BONDS AT MATURITY 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: Date Account Debit Credit Maturity date Bonds Payable 100,000 Cash 100,000 (record payment of bonds at maturity) 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

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. 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: (B) (C) (D) Semiannual (A) Interest Reduction Principal Interest Cash Expense Of Principal Balance Period Payment (D) x 6% (A) – (B) (D) –(C) Issue date $500,000 1 33,231 $30,000 $3,231 496,769 2 $33,231 29,806 3,425 493,344

LONG-TERM NOTES PAYABLE JOURNAL ENTRIES The entries to record the issuance and first interest payment are: Date Account Debit Credit Dec 31 Cash 500,000 Mortgage Notes Payable 500,000 (record mortgage loan) June 30 Interest Expense 30,000 Mortgage Notes Payable 3,231 Cash 33,231 (record first installment payment)

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

End of Chapter 10 4