ACCY 201 FINAL

liability

-past transaction or event
-present obligation
-future payment of assets or services

current liabilities

-due within one year
-A/P, N/P, wages pay, current portion of long term debt, taxes pay, and unearned rev

long term liabilities

-due in longer than one year
-long term N/P, bonds pay, and warranties

uncertainty in liabilities

whom to pay
when to pay
how much to pay
-you may not know these, but you still know there is an obligation

categories of liabilities

-known liabilities (definitely determinable)
-estimated liabilities
-contingent liabilities

known liabilities (typical A/P)

-definitely determinable amounts
-set by agreements, contracts, or laws
-A/P (owed to suppliers
-sales tax payable
-unearned rev, short term N/P, and payroll liabilities

sales tax payable entry

dr cash
cr sales
cr sales tax payable (not exp--we are agent)

short term N/P

-promise to pay a certain amount, on a certain date, with interest
- in writing (stronger than A/P)
-interest= principal x rate x (time/360 days)
-can extend credit period (replaces A/P)
-can borrow directly from bank

entry for N/P replacing A/P

dr A/P
cr N/P

entry when borrowing directly from bank

dr cash
cr N/P

maturity date entry

dr N/P
dr interest exp
cr cash

entry for year end adjustment with note outstanding

dr interest exp
cr interest pay

gross pay

total compensation an employee earns

salary

monthly or yearly rate

wages

hourly rate

how to find net pay

gross pay

required employee withholdings

Social Security
Medicare
Federal tax
State tax

employee entry purpose

to book payroll -- company sends money to government on your behalf

employee entry

dr salary expense (gross)
cr SS pay
cr Medi pay
cr Fed tax pay
cr State tax pay
cr salary pay (net)

required employer benefits and taxes

Social Security
Medicare
Federal Unemployment Tax (FUTA)
State Unemployment Tax (SUTA)

employer entry purpose

records employers contribution to taxes and benefits

employer entry

dr SS exp
cr SS pay
dr Medi exp
cr Medi pay
dr FUTA exp
cr FUTA pay
dr SUTA exp
cr SUTA pay

payroll liabilities internal controls

hiring
payroll preparation
time keeping
payroll payment m

multiperiod liabilities

current portion of long term debt

reclass entries

-only for F/S
-not in books
dr LTD
cr Current portion of LTD

estimated liabilities

-known liabilities
-uncertain amount
-can be reasonably estimated
-pension/retirement benefits, healthcare benefits, vacation pay, warranties

when do you use liability set up

to take care of a problem covered under warranty

entry for estimated liabilities

dr vacation exp
cr vacation pay

contingent liabilities

-potential obligation
-future event happens because of past event
-lawsuit

types of contingent liabilities

-probable (likely)
-possible (could occur)
-remote (unlikely)

probable liability that you can estimate

record

probable liability that you cannot estimate

disclose

possible liability

disclose

remote liability

do not disclose-- ignore

form 941

quarterly report for fed w/h, ss, and medi

form 940

quarterly report for FUTA

w2

annual earnings/withholdings statement

w4

withholdings form

payroll register

lists all employees and summarizes

employee earnings report

takes one employee and looks at pay

deferred taxes

-liability caused by timing differences between GAAP and IRS
-employer vs employee
-corporate income tax

employer vs employee

who pays what?c

corporate income tax

-GAAP and IRS rules are different
-this difference creates deferred taxes
-timing differences can be involved

issuing a bond

borrowing money

bond

issuers written promise to pay the par value of the bond plus interest

par value

face value of the bond (amount stated on the bond)

maturity date

when the bond is to be paid back

semianual interest

bond interest is usually twice per year

advantages of a bond

-does not change ownership control (stock does)
-interest is tax deductible
-can increase return on equity
-company should earn more with the project they spend the bond money on than they have to pay in interest for those bonds

return on equity

net income/equity

disadvantages of bonds

-can decrease return on equity
-project may not earn more than the amount that has to be paid back in interest
-requires a regular cash outlay for principal and interest

bond indenture

-legal contract between the issuer and the bondholders
-identifies rights and responsibilities of the issuer and bondholders

bond certificate

-evidence of the debt that the bondholder may receive
-proof of bond ownership providing rights of interest to be paid back

contract/coupon rate

the interest rate stated on the bonds

market rate

the interest rate that the bond is trading for in the bond market
-what a bond is normally paid for at the moment
-rate borrowers are willing to pay and lenders are willing to accept for a bond and its risk level

bond issuance at par

-when a bond is sold at its face value, it is sold at par
-happens when contract rate = market rate

entry to issue bonds

dr cash
cr bonds pay

amount of interest to be paid for bonds

principal x rate x 1/2 (semianual interest)

bonds sold at discount

occurs when contract rate is less than the market rate

discount

principal to be paid back - cash received at issuance

amortize discounts

we amortize discounts over the life of the bonds as additional interest expense

bonds sold at a premium

occurs when contract rate is more than market rate
-- people are willing to pay more to get the higher interest rate

premium

cash received at issuance - principal to be paid back

amortize premium

we amortize the premium over the life of the bonds and reduce interest expense

methods to amortize bonds

-straight line method
-effective interest method
-- all discount or premiums should be amortized by maturity

straight line bond amortization

allocates equal bond interest expense to each interest period

entry to retire bonds

dr bonds payable
cr cash

secured bonds

-pledges a specific asset of the issuer as collateral

unsecured bonds

-debentures
-no specific collateral
-loaned on credit worthiness of the institution

term bonds

all mature on the same date

serial bonds

-mature in a series of dates
-has varying maturity dates

sinking funds bond

-have a pool of money set aside to pay debt when the bond is due
-maintains separate asset account from which bondholders are paid at maturity

registered bonds

-registrar keeps up with names and addresses of bond holders
-records and tracks bondholders names

bearer bonds

-unregistered. whoever has them owns them. these are the ones stolen in movies
-unregistered, interest is paid to whoever possesses them

convertible bonds

-can be exchanged for shares of the companies stock
-can be exchanged for stock

callable bonds

issuer can pay them back at the stated amount before maturity

effective interest method

accounting method that allocates interest expense over a bonds life in a way that yields constant interest rate

long term N/P

-works like short term N/P
-borrowed from a bank with a maturity greater than a year
-interest exp= loan balance x rate x (time/360)

installment notes

paid back in a series of payments that include interest and principal
-- as the principal is reduced, the interest amount of each payment goes down

mortgage

-long term note, typically paid back in installments
-legal agreement that protects the lender if payments are not paid as required
-usually real estate is pledged as collateral
-if the lender takes possession of the collateral due to non-payment, it is called foreclosure

debt to equity ratio

total liabilities / total equity

pension/retirement liabilities

-defined contribution plan
-defined benefit plan

defined contribution plan

stated amount to be paid to pension
(salary x rate)

defined benefit plan

benefits related to how long a person works, lives, and how much they make
-- determined by actuaries

corporation

legal entity separate from owners

advantages of a corporation

-separate legal entity
-limited liability of stockholders
-transferable ownership rights
-continuous life
-no mutual agency
-ease of capital generation

disadvantages of a corporation

-government regulation
-double taxation

organization of corporations

-the corporation is created by getting a charter from the state government
-stockholders elect a board of directors to oversee corporate activities
-the board selects management to run day-to-day operations
-to control the corporation you need to own more than 50%

common stockholders rights

-vote
-sell stock
-preemptive right to purchase proportional shares and keep ownership percentage
-receive common dividends
-share assets in liquidation after creditors and preferred stockholders

authorized share

number of shares that the charter allows the corporation to sell

issued shares

number of shares that have ever been sold

outstanding shares

number of shares ever issued that are still held by stockholders

market value

price at which stock is bought and sold (changes daily)

classes of stock

common
common a
common b
preferred

par value

minimum legal capacity
-arbitrary amount placed on shares by the charter n

no par stock

no par is assigned by the charter

stated value

works like par value

stockholders equity

-common stock
-paid in capita in excess of par
-retained earnings

dividends

rewards to owners paid only by the board of directors

date of declaration

liability date
-board say "we will pay dividend"