Final Accounting chapter 8 and 9

Current Liability

Payable within one year

Long-term Liability

Payable in more than one year

Notes payable

Note signed by a firm promising to repay the amount borrowed plus interest

Interest calculation formula

Interest = Face Value x Annual Interest Rate x Fraction of the year

Recording Notes Payable

Debit: Cash - Credit: Notes Payable

Recording Interest Payable

Debit: Interest Expense, Credit: Interest Payable

Recording Retirement

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Sales discounts

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Line of credit

Informal agreement allowing a company to borrow up to a prearranged limit, recorded like notes payable

Commercial Paper

Borrowing from another company rather than a bank, maturities range from 30 to 270 days, interest rates are lower than bank loans.

Payroll costs: Employee

Federal and state income tax, FICA (Medicare and Social Security), and optional deductions like health insurance or retirement investments

Payroll costs: Employer

Federal and state unemployment tax, matching FICA taxes, fringe benefits

Other current liabilities: Deferred Revenue

Cash received in advance from a customer

Other current liabilities: Sales Tax Payable

Sales tax collected from customers, needs to be paid to government

Other current liabilities: Current Portion of Long Term Debt

Payable within one year

Contingent Liabilities

An uncertain situation that might result in a loss

Contingent Liabilities: Probable (>75% likelihood) and Reasonably Estimable

Record as a liability and an expense.

Contingent Liabilities: Reasonably Possible OR Probable but Not Estimable

Disclose in the notes to financial statements; no liability is recorded

Contingent Liabilities: Remote (<50% likelihood)

No disclosure or recording required

Warranty

The most common contingent liability. Estimated warranty expense must be recorded in the same period as the sale

Recording a warranty

Debit: Warranty Expense, Credit: Warranty Liability

Contingent Gains

An uncertain situation that might result in a gain

Working Capital formula

Current assets - Current liabilities

Current Ratio formula

Current assets / Current liabilities

Acid-Test (Quick) Ratio formula

(Cash + Current Investments + Accounts receivable) / Current Liabilities

Financing alternatives: Debt financing

Borrowing money

Financing alternatives: Equity financing

Selling shares

Installment notes

Periodic payments that include both interest and a reduction in the outstanding loan balance

Installment notes: Interest vs. Principal

In early payments, interest is higher but as the carrying value decreases, the interest portion decreases and the principal reduction increases

Leases

Agreement where the owner provides the user the right to an asset for a specified period of time

Recording leases

Debit: Lease Asset, Credit: Lease Payable for the present value (PV) of the lease payments

Present Value (PV) formula

Future Value (FV) / (1+r)^n

Bonds Payable: Pricing (formula)

The issue price equals the PV of the face amount plus the PV of periodic interest payments.

Bonds Pricing: Face Amount

Stated Rate = Market Rate

Bonds Pricing: Discount

Stated Rate < Market Rate

Bonds Pricing: Premium

Stated Rate > Market Rate

Bond characteristics: Secured vs unsecured

Backed by collateral vs not backed by collateral

Bond characteristics: Term

Matures on a single date

Bond characteristics: Serial

Matures in installments

Bond characteristics: Callable

Issuer can pay off bonds early

Bond characteristics: Convertible

Investor can exchange bonds for common stock

Discount vs premium: Interest expense (formula)

Carrying value x market interest rate

Discount vs premium: Cash paid (formula)

Face amount x Stated Interest Rate

Amortization for bonds issued at a discount

Carrying value and interest expense increase over time

Amortization for bonds issued at a premium

Carrying value and interest expense decrease over time

Pricing a bond: Market vs States interest rate

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What does Debt to Equity Ratio (Leverage) measure

Level of risk

Debt to Equity Ratio (Leverage) Formula

Total Liabilities / Stockholders’ Equity

What does Times Interest Earned Ratio measure

How many times greater earnings are then interest expense

Times Interest Earned Ratio formula

(Net Income + Interest Expense + Tax Expense) / Interest Expense