,Chapter 10,Liabilities,The Nature of Liabilities,I.O.U.,Defined as debts or obligations arising from past transactions or events.,Maturity = 1 year or less,Maturity 1 year,Distinction Between Debt and Equity,The acquisition of assets is financed from two sources:,Funds from creditors, with a definite due date, and sometimes bearing interest.,Funds from owners,DEBT,EQUITY,LiabilitiesQuestion,Devon Mfg. borrows $100,000 from First Bank. The loan will be repaid in 20 years and has an annual interest rate of 8%. Is this a current liability or a noncurrent liability?,LiabilitiesQuestion,The obligation will not be paid within one year or one operating cycle, so it is a noncurrent liability.,Devon Mfg. borrows $100,000 from First Bank. The loan will be repaid in 20 years and has an annual interest rate of 8%. Is this a current liability or a noncurrent liability?,Evaluating Liquidity,Current Ratio = Current Assets ?Current Liabilities,Working Capital = Current Assets - Current Liabilities,An important indicator of a company抯 ability to meet its current obligations. Two commonly used measures:,LiabilitiesQuestion,Devon Mfg. has current liabilities of $230,000 and current assets of $322,000. What is Devons current ratio?,LiabilitiesQuestion,Devon Mfg. has current liabilities of $230,000 and current assets of $322,000. What is Devons current ratio?,Accounts Payable,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,Notes Payable,Current Notes Payable,Noncurrent Notes Payable,Total 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.,Notes Payable,PROMISSORY NOTE Location Date after this date promises to pay to the order of the sum of with interest at the rate of per annum. signed title,Miami, Fl,Nov. 1, 1999,Six months,Porter Company,John Caldwell,Security National Bank,$10,000.00,12.0%,treasurer,Notes Payable,On November 1, 1999, Porter Company would make the following entry.,Interest expense is the compensation to the lender for giving up the use of money for a period of time. The liability is called interest payable. To the lender, interest is a revenue. To the borrower, interest is an expense.,Interest Rate Up!,Interest Payable,The interest formula includes three variables that must be considered when computing interest:,Interest = Principal ?Interest Rate ?Time,When computing interest for one year, time?equals 1. When the computation period is less than one year, then time?is a fraction.,Interest Payable,For example, if we needed to compute interest for 3 months, time?would be 3/12.,What entry would Porter Company make on December 31, the fiscal year-end?,Interest PayableExample,Interest PayableExample,On December 31, Porter Company would record interest payable with the following entry:,$10,00012% 2/12 = $200,Payroll Liabilities,Employers incur several expenses and liabilities from having employees.,FICA Taxes,Medicare Taxes,Federal Income Tax,State and Local Income Taxes,Voluntary Deductions,Net Pay,Gross Pay,Payroll Liabilities,Deferred revenue is recorded.,Deferred revenue is a liability account.,Cash is received in advance.,Cash is sometimes collected from the customer before the revenue is actually earned.,Unearned Revenue,Earned revenue is recorded.,As the earnings process is completed . . .,Deferred revenue is recorded.,Cash is received in advance.,Unearned Revenue,Cash is sometimes collected from the customer before the revenue is actually earned.,Relatively small debt needs can be filled from single sources.,Banks,Insurance Companies,Pension Plans,or,or,Long-Term Debt,Large debt needs are often filled by issuing bonds.,Long-Term Debt,Installment Notes Payable,Long-term notes that call for a series of installment payments.,Each payment covers interest for the period AND a portion of the principal.,With each payment, the interest portion gets smaller and the principal portion gets larger.,Allocating Installment Payments Between Interest and Principal,Identify the unpaid principal balance. Unpaid Principal ?Interest rate = Interest expense. Installment payment - Interest expense = Reduction in unpaid principal balance. Compute new unpaid principal balance.,Allocating Installment Payments Between Interest and Principal,On January 1, 1999, Rocket Corp. borrowed $7,851.57 from First Bank of River City. The loan was a five-year loan and had an interest rate of 10%. The annual payment is $2,000. Prepare an amortization table for Rocket Corp.s loan.,Allocating Installment Payments Between Interest and Principal,Now, prepare the entry for the first payment on January 1, 2000.,Allocating Installment Payments Between Interest and Principal,The information needed for the j