- Probable debts pr obligations of the entity that result from past transactions, which will be paid with assets or services.
- Current Lia.- Maturity 1 year or less
- Noncurrent Lia- Maturity more than one year
Employers incur several expenses and liabilities from having employees.
Employee Income Tax
- Federal income tax// State and local income tax
- Amount withheld depend on the employee's earning and the tax rates.
- Employers owe the income tax amounts withheld from employee's gross pay to the appropriate government agency.
- Current Liability.
Employee FICA taxes
Social security tax paid by employees required by the federal insurance contribution act.
Employee Voluntary Deductions
- Amount withheld depend on the employee's request.
- Employers owe the voluntary deductions withheld from employees gross pay to the designated agency.
Face value equals amount borrowed----cash received equals face value
Face value equals amount borrowed plus interest---- cash received is less than face value.
End of Periods adjustment to notes
An adjusting entry is required to record interest expense incurred to date.
Borrowing in Foreign currencies
- When a company has operations in a foreign country, it often borrows in the local currency. This reduces exchange rate risk.
- Because interest rates vary from country to country, companies may borrow in the foreign market with the lowest interest rate.
Current Assets- Current Liabilities
Changes in working capital accounts affect cash flows as indicated in the following table.
Is the company able to pay its debts as they come due.
- Current Assets / Current Liabilities
- Measure of liquidity.
Compounding within a year
- Dealing with time periods other than one year, when the amount of time is stated in terms of an annual rate:
- n= number of years x compounding periods in one year
- i= annual interest rate / compounding periods in one year
Future Value of a Lump Sum
- P= amount today
- Fn= amount after n years
- i= interest rate per number of time periods
- n= number of time periods
- Fn= P x (1+i) ^N
- table A.3
Present Value of a Lump Sum
- P= Fn / (1+i) ^n
- table A.1
- An annuity is made up of equal cash flows at equal intervals. Many rental payments and mortgage payments are annuities.
- Equal dollar amount each interest period.
- Interest periods of equal length.
- Equal interest rate each interest period.
- table A.2
Present Value of Annuity
- The value now of a series of equal amounts to be received for some specified number of periods in the future.
- Table A.2
Is the sum to which an amount will increase as the result of compound interest.
Future Value of a Single Amount
- Table A.3
- Asked to calculate how much money you will have in the future as the result of investing a certain amount in the present.
Future Value of Annuity
- Deposit a fixed amount of money into a saving account each month. This will tell you what you will have in the future.
- Table A.4
The amount the bond promises to pay the holder at maturity.
Stated Rate, Coupon Rate
Multiplied by the face value, it determines the cash paid by the issuer at regular time intervals, usually semi-annually.
Market Rate, Price to Yield x%
- The market rate will be the discount rate used in the issuance present value calculation.
- MIR- current rate of interest on a debt when incurred.
Bond Premium Case
- The difference between the selling price and par when the bond is sold more than par.
- Stated Rate > Market rate
- Price > Face Value
Bond Discount Case
- The difference between the selling price and par when the bond is sold for less than par.
- Stated Rate< Market Rate
- Price < Face Value
Bond market values are expressed as a percent of their par value.
Bond issued at Par
- Stated Rate = Market Rate
- Price = Face Value
Advantages of Bonds
- Bonds do not affect owner control.
- Interest on bonds is tax deductible.
- Bonds can increase return on equity.
Disadvantages of Bonds
- Bonds can decrease return on equity when the company pays more in interest that it earns on the borrowed funds.
- Bonds require payment of both periodic interest and par value at maturity.
Debt to Equity= Total Liabilities / Owners Equity
This ration shows the relationship between the amount of capital provided by owners and the amount provided by creditors. In general, a high ration suggest that a company relies heavily on funds provided by creditors.
- Purchase goods from other businesses to make their business run.
- These transactions create accounts payable.
- Interest does not usually accrue on AP
- Expenses that have been incurred before the end of an accounting period but have not been paid.
- Ex- Property tax, electricity, and salaries.
- Recorded as adjusting entries at year end,
Time Value of Money- Interest
- Interest that is associated with the use of money over time.
- To calculate interest you must remember three things 1. principle (cash borrowed) 2. annual interest rate 3. time period for loan.
- Interest = principle x interest rate x time
Revenues that have been collected but not earned; they are liabilities until the goods or services are provided.
Is a potential liability that has arisen as the result of a past event; not an effective liability until some future events occurs.
Long Term Liabilities
- Include all obligations that are not classified as current liabilities, such as long term notes payable and bonds payable.
- More than one year in the future.
- when a company leases an asset on a short term basis. (delivery trucks)
- Does not meet any of the four criteria established by GAAP and does not require the recording of a asset r liability.
- Most prefer to record it as this type of lease.
- Lease an asset for a long term basis rather than purchase it.
- Meets at least one of the four criteria established by GAAP and results in the recording of an asset and liability.
Four Criteria to be a Capital lease and not a Operating Lease
- Lease term is 75 percent or more of the assets expected economic life.
- Ownership of the asset is transferred to the lessee at the end of the lease term
- The lease contract permits the lessee to purchase the asset at a price that is lower than its fair market value.
- Present value of the lease payments is 90 percent or more of the fair market value of the asset when the lease is signed.
is the current value of an amount to be received in the future; a future amount discounted for compound interest.
- is the amount payable at the maturity of the bond and on which the periodic cash interest payments are computed.
- Also called par value or face amount.
Unsecured bond; no assets are specifically pledged to guarantee repayment.
may be called for early retirement at the option of the issuer.
May be converted to other securities of the issuer. (usually common stock)
Is a bond contract that specifies the legal provisions of a bond issue.
Who determines the price at which the bond sells?
- Market determines.
- Not the issuing company or the underwriter.
Present Value of a Bond
Present value of the principle and the present value of the interest payments and add them together.
Straight Line Amortization- Issued at Discount
- Simplified method of amortizing a bond discount or premium that allocates an equal dollar amount to each interest period.
- Divide the difference between the issue bond and the bonds payable by the number of periods.
- Each period the book value will now be increased by this amount.
- More companies use this.
- DIVIDE BY # OF PERIODS!!
Effective Interest Method- Issued at Discount
- Amortizes a bond discount or premium on the basis of the effective interest rate; it is the theoretically preferred method.
- A. (Bond Amount X % X 1/2)
- B. (Beginning Book Value X Dif. % X 1/2)
- C. (A-B)
- D. Beginning Book Value + C
If you need money you can sell bonds to other investors and it will not affect the books.