PRINCIPLES OF FINANCIAL ACCOUNTING

Chapter 10

Liabilities Definition

The debts and obligations of a business. Liabilities represent claims of creditors on the assets of a business.

Current liability: Debts expected to be paid within one year

or the operating cycle, whichever is longer. Debts to be paid from existing current

assets or through the creation of other current liabilities.

Types of current liabilities Notes Payable

Refer to example on page 453 Sales Tax Payable

Refer to example on page 454 Payroll and payroll taxes payable

Refer to example on page 355 Unearned revenues

Refer to the example on page 456 Current maturities of long-term debt

Analysis – Liquidity ratios Working capital – Current assets

less current liabilities Current ratio – Current assets

divided by current liabilities Acid test – Cash + Short term

Investments + Net receivables divided by current liabilities

Long-term debt Types of bonds:

Secured bonds Mortgage bonds Sinking fund

Unsecured bonds – debenture bonds Term or serial bonds – several

maturity dates Convertible and Callable Bonds

Bond terms Bond indenture – the bond contract Face value – the principal at

maturity Contractual interest rate – interest

paid on the bond Bond certificates

Determining the market value of bonds Present value of the maturity value Plus the present value of the

interest payments At the rate the bondholder selects

as yield rate

Bond journal entries Sale of bonds at face value –

example on page 466 Sale of bonds at a discount –

example on page 468 Sale of bonds at a premium –

example on page 470

Analysis Debt to total assets ratio:

Total liabilities / total assets Times interest earned ration:

Net income + interest expense + income tax / Interest expense

Contingent Liabilities Accrue (record journal entry) if the

loss is probable to happen and can be reasonably estimated.

Report only (footnote) if it does meet the above criteria unless the loss is remote then no disclosure is needed.

Lease Liabilities Operating lease – generally

temporary Report lease payments as Rent expense

Capital leases – Fair market value of the asset and the related liability for lease payments are recorded on the balance sheet. – Most companies try to avoid this.

Assignment E10-1 E10-4 E10-5 E10-6 E10-8 BYP10-2 BYP10-10 part a only