Accounting

Bond book value

The carrying value of a bond on the issuer's balance sheet, equal to the face value plus unamortized premium or minus unamortized discount

Debenture

An unsecured bond backed only by the issuer's creditworthiness, not by specific assets

Indenture

A legal contract between a bond issuer and bondholders that specifies the terms of the bond

Discount on bond

The difference between the bond's face value and its lower issue price when sold below par

Discount vs. Premium on Debt

• Discount: Bond issued below face value; market interest rate > coupon rate

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• Premium: Bond issued above face value; market interest rate < coupon rate

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Effective vs. Contract Interest Rate

• Effective interest rate: The true rate of interest earned, accounting for compounding

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• Contract (nominal) interest rate: The stated annual interest rate without accounting for compounding

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Amortization Process on Discounts/Premiums

Amortization spreads the discount or premium over the bond's life, adjusting interest expense to reflect the effective interest rate

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Capital vs. Operating Lease

• Capital lease: Treated as an asset purchase; recorded on the balance sheet.

• Operating lease: Treated as a rental expense; not recorded on the balance sheet.

Discount on Notes Payable

Represents the difference between the face value and the present value of a note payable, amortized over the note's life.

Sales Tax Payable

Recorded as a liability when collected from customers, remitted to tax authorities periodically.

Contingent Liability

A potential obligation dependent on a future event occurring or not occurring

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Definitely Determinable Liability

Examples: Accounts payable, notes payable, bonds payable.

Estimated Liability

Examples: Warranty liability, pension liability, environmental cleanup liability.

Payroll Tax Liability vs. Expense

• Liability: Amount owed to tax authorities.

• Expense: Cost to the employer for employee compensation.

Social Security and Payroll

Employers withhold Social Security taxes from employee wages and match the contribution

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Product Warranties

Expense occurs when the warranty is issued, typically at the point of sale

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Employee vs. Independent Contractor

• Employee: Works under company control, receives benefits, taxes withheld.

• Independent contractor: Self-employed, controls own work, responsible for own taxes.

Tax Forms

• W-2: Reports annual wages and taxes withheld for employees

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• W-4: Employee's withholding allowance certificate

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• 1099: Reports non-employee compensation to independent contractors

Basic Payroll Tax Return Form Numbers

• Form 941: Quarterly Federal Tax Return

• Form 940: Annual Federal Unemployment (FUTA) Tax Return

Ceilings for Payroll Liabilities

• Social Security tax: Wage base limit ($168,600 for 2024)

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• Medicare tax: No wage base limit.

• FUTA tax: First $7,000 of each employee's wages.