Chapter10 Liabilities TheNatureofLiabilities I O U Definedasdebtsorobligationsarisingfrompasttransactionsorevents Maturity 1yearorless Maturity 1year DistinctionBetweenDebtandEquity Theacquisitionofassetsisfinancedfromtwosources Fundsfromcreditors withadefiniteduedate andsometimesbearinginterest Fundsfromowners DEBT EQUITY LiabilitiesQuestion DevonMfg borrows 100 000fromFirstBank Theloanwillberepaidin20yearsandhasanannualinterestrateof8 Isthisacurrentliabilityoranoncurrentliability LiabilitiesQuestion Theobligationwillnotbepaidwithinoneyearoroneoperatingcycle soitisanoncurrentliability DevonMfg borrows 100 000fromFirstBank Theloanwillberepaidin20yearsandhasanannualinterestrateof8 Isthisacurrentliabilityoranoncurrentliability EvaluatingLiquidity CurrentRatio CurrentAssets CurrentLiabilities WorkingCapital CurrentAssets CurrentLiabilities Animportantindicatorofacompany抯abilitytomeetitscurrentobligations Twocommonlyusedmeasures LiabilitiesQuestion DevonMfg hascurrentliabilitiesof 230 000andcurrentassetsof 322 000 WhatisDevon scurrentratio LiabilitiesQuestion DevonMfg hascurrentliabilitiesof 230 000andcurrentassetsof 322 000 WhatisDevon scurrentratio AccountsPayable Short termobligationstosuppliersforpurchasesofmerchandiseandtoothersforgoodsandservices MerchandiseInventoryinvoices Shippingcharges Utilityandphonebills Officesuppliesinvoices NotesPayable CurrentNotesPayable NoncurrentNotesPayable TotalNotesPayable Whenacompanyborrowsmoney anotepayableiscreated CurrentPortionofNotesPayableTheportionofanotepayablethatisduewithinoneyear oroneoperatingcycle whicheverislonger NotesPayable PROMISSORYNOTELocationDateafterthisdatepromisestopaytotheorderofthesumofwithinterestattherateofperannum signedtitle Miami Fl Nov 1 1999 Sixmonths PorterCompany JohnCaldwell SecurityNationalBank 10 000 00 12 0 treasurer NotesPayable OnNovember1 1999 PorterCompanywouldmakethefollowingentry Interestexpenseisthecompensationtothelenderforgivinguptheuseofmoneyforaperiodoftime Theliabilityiscalledinterestpayable Tothelender interestisarevenue Totheborrower interestisanexpense InterestRateUp InterestPayable Theinterestformulaincludesthreevariablesthatmustbeconsideredwhencomputinginterest Interest Principal InterestRate Time Whencomputinginterestforoneyear time equals1 Whenthecomputationperiodislessthanoneyear thentime isafraction InterestPayable Forexample ifweneededtocomputeinterestfor3months time wouldbe3 12 WhatentrywouldPorterCompanymakeonDecember31 thefiscalyear end InterestPayableExample InterestPayableExample OnDecember31 PorterCompanywouldrecordinterestpayablewiththefollowingentry 10 000 12 2 12 200 PayrollLiabilities Employersincurseveralexpensesandliabilitiesfromhavingemployees FICATaxes MedicareTaxes FederalIncomeTax StateandLocalIncomeTaxes VoluntaryDeductions NetPay GrossPay PayrollLiabilities Deferredrevenueisrecorded Deferredrevenueisaliabilityaccount Cashisreceivedinadvance Cashissometimescollectedfromthecustomerbeforetherevenueisactuallyearned UnearnedRevenue Earnedrevenueisrecorded Astheearningsprocessiscompleted Deferredrevenueisrecorded Cashisreceivedinadvance UnearnedRevenue Cashissometimescollectedfromthecustomerbeforetherevenueisactuallyearned Relativelysmalldebtneedscanbefilledfromsinglesources Banks InsuranceCompanies PensionPlans or or Long TermDebt Largedebtneedsareoftenfilledbyissuingbonds Long TermDebt InstallmentNotesPayable Long termnotesthatcallforaseriesofinstallmentpayments EachpaymentcoversinterestfortheperiodANDaportionoftheprincipal Witheachpayment theinterestportiongetssmallerandtheprincipalportiongetslarger AllocatingInstallmentPaymentsBetweenInterestandPrincipal Identifytheunpaidprincipalbalance UnpaidPrincipal Interestrate Interestexpense Installmentpayment Interestexpense Reductioninunpaidprincipalbalance Computenewunpaidprincipalbalance AllocatingInstallmentPaymentsBetweenInterestandPrincipal OnJanuary1 1999 RocketCorp borrowed 7 851 57fromFirstBankofRiverCity Theloanwasafive yearloanandhadaninterestrateof10 Theannualpaymentis 2 000 PrepareanamortizationtableforRocketCorp sloan AllocatingInstallmentPaymentsBetweenInterestandPrincipal Now preparetheentryforthefirstpaymentonJanuary1 2000 AllocatingInstallmentPaymentsBetweenInterestandPrincipal Theinformationneededforthejournalentrycanbefoundontheamortizationtable Thepaymentamount theinterestexpense andtheamounttocredittoprincipalareallonthetable BondsPayable Bondsusuallyinvolvetheborrowingofalargesumofmoney calledprincipal Theprincipalisusuallypaidbackasalumpsumattheendofthebondperiod Individualbondsareoftendenominatedwithaparvalue orfacevalue of 1 000 BondsPayable Bondsusuallycarryastatedrateofinterest alsocalledacontractrate Interestisnormallypaidsemiannually Interestiscomputedas Interest Principal StatedRate Time BondsPayable Bondsareissuedthroughanintermediarycalledanunderwriter Bondscanbesoldonorganizedsecuritiesexchanges Bondpricesareusuallyquotedasapercentageofthefaceamount Forexample a 1 000bondpricedat102wouldsellfor 1 020 TypesofBonds Mortg