Kế toán, kiểm toán - Chapter 7: Accounting for and presentation of liabilities

CHAPTER 7ACCOUNTING FOR AND PRESENTATION OF LIABILITIESMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat is the financial statement presentation of short-term debt and current maturities of long-term debt?What is the difference between interest calculated on a straight basis and on a discount basis?What are unearned revenues and how are they presented in the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives What is the accounting for employer’s liability for payroll and payroll taxes?What is the importance of making estimates for certain accrued liabilities and how are these items presented in the balance sheet?What is leverage and how is it provided by long-term debt?What are the different characteristics of a bond?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives Why does bond discount or premium arise and how is it accounted for?What are deferred income taxes and why do they arise?What is minority interest, why does it arise, and what does it mean in the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1What is the financial statement presentation of short-term debt and current maturities of long-term debt?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Current LiabilitiesAmounts due within one year or operating cycleA working capital loan is a short-term loan with the expectation that it will be repaid from the collection of accounts receivable generated by the sale of inventoryA revolving line of credit is a predetermined maximum amount, but flexibility in timing and amount borrowed McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Notes PayableA note is a formal promise to pay a stated amount at a stated date, usually with interestPrime rate is the term frequently used to express the interest rate on short-term loansMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2What is the difference between interest calculated on a straight basis and on a discount basis?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Interest Calculation MethodsStraight interest is calculated as follows:Interest = Principal X Rate X Time (in years)A discount is interest that is subtracted from the loan principal and the borrower receives the differenceThe difference received by the borrower is called the proceedsThe discounted amount is shown in the balance sheet as a contra liabilityMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Current Maturities of Long-Term DebtThe portion of long-term borrowing that must be repaid within a year of the balance sheet date is reported as a current liabilityThe remainder of the long-term debt is shown in noncurrent liabilitiesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Accounts PayableAccounts payable are amounts owed to suppliers for goods and services that have been provided to the entity on creditMay be reported using either the gross or the net methodThe gross method recognizes cash discounts when the invoices are paid within the discount periodThe net method recognizes cash discounts when purchases are madeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What are unearned revenues and how are they presented in the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Unearned Revenues or Deferred CreditsUnearned revenues occur when customers pay for goods or services before the goods or services are delivered: Cash XX Unearned revenue XXWhen earned, the liability of unearned revenues is removed and recorded as revenues: Unearned revenue XX Revenue XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4What is the accounting for employer’s liability for payroll and payroll taxes?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Payroll Taxes and Other WithholdingsGross pay is wages earned byan employeeNet pay is the amount the employee receives after deductionsDeductions include federal income tax, state income tax, FICA withholding, union dues, and many othersMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Liabilities from WithholdingsAmounts withheld are liabilities to the employer until paidAdditional liabilities result since employers are subject to federal and state payroll taxesThese payroll taxes are an expense to the employerMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Accrued LiabilitiesThere are many other liabilities that are accrued by entitiesAccrued property taxesEstimated warranty liabilitiesAccrued interest – if not reported separatelyMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What is the importance of making estimates for certain accrued liabilities and how are these items presented in the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Presentation of Accrued LiabilitiesEstimates of accrued liabilities are presented on the balance sheet as current liabilities since they are due within one year of the balance sheet dateThese estimated items are originally recorded as increases in expenses and increases in liabilitiesAdjustments are made to the liabilities as the actual cost is determinedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6What is leverage and how is it provided by long-term debt?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Noncurrent LiabilitiesCapital structure is the mix of debt and owners’ equity used to finance the acquisition of the firm’s assetsUsing long-term debt has the advantage of having interest expense being deductible – whereas dividends on stock are not deductibleMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial LeverageFinancial leverage is the difference between the rate of return earned on assets (ROI) and the rate of return earned on owners’ equity (ROE)A firm can borrow money to purchase assets and use those assets to earn a rate of return greater than the interest incurred on the borrowed fundsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What are the different characteristics of a bond?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bonds PayableMost long-term debt is issued in the form of bondsA bond is a formal debt document usually issued in denominations of $1,000Bond prices are expressed as a percentage of the bonds principal amountMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8Why does bond discount or premium arise and how is it accounted for?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bond Premiums and Bond DiscountsA bond premium is the excess of a bond’s market value over its face amountA bond discount is the excess of the face amount over the market value of the bondPremiums and discounts usually result from differences between stated interest rates on the bonds and the market rate of interestMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Reporting Bonds – At ParIssuance of bond: Cash XX Bonds payable XXRecording interest expense: Interest expense XX Cash XXRetirement of bond: Bonds payable XX Cash XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Reporting Bonds – At DiscountIssuance of bond: Cash XX Discount on bonds payable XX Bonds payable XXRecording interest expense: Interest expense XX Discount on bonds payable XX Cash XXRetirement of bond: Bonds payable XX Cash XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Reporting Bonds – At PremiumMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Issuance of bond: Cash XX Premium on bonds payable XX Bonds payable XXRecording interest expense: Interest expense XX Premium on bonds payable XX Cash XXRetirement of bond: Bonds payable XX Cash XXTypes of BondsCallable bonds – the issuer may payoff the bonds before the scheduled maturity dateRegistered bonds – the name and address of the bond owner is known to the issuerCoupon bonds – the owner is not known to the issuerDebenture bonds – secured only by the general credit of the issuerMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More Types of BondsMortgage bonds – secured by a lien against real estate owned by the issuerTerm bonds – requires a lump-sum payment of the face amount of the bonds at maturitySerial bonds – repaid in installmentsConvertible bonds – may be converted into stock of the issuer corporation at the option of the bondholderMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 9What are deferred income taxes and why do they arise?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Deferred Tax LiabilitiesDeferred tax liabilities are provided for temporary differences between income tax and financial statement recognition of revenues and expensesNormally are long-term liabilitiesThe most significant temporary difference is related to depreciation expenseThe deferred tax liability is the difference between income tax expense and income tax payableMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Noncurrent LiabilitiesObligations related to pension plans are noncurrent liabilitiesObligations related to post-retirement benefitsEstimated liability under lawsuits in progress also may be listed as noncurrent liabilitiesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 10What is minority interest, why does it arise, and what does it mean in the balance sheet? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Minority Interest in SubsidiariesA subsidiary is a corporation that is more than 50% owned by the firm for which financial statements have been preparedThe resulting financial statements are called consolidated financial statementsMinority interest arises if the subsidiary is not 100% owned by the parent corporationThe minority is the equity of other shareholdersMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002