Chapter 10: Liabilities

liability

When a company buys goods/services, takes short term loans, and issues long term debt, this creates a(n) ________.

long term debt

When a company issues ________, this can create a Notes Payable or a Bonds Payable.

Current liabilities

________ are short term liabilities that expected to be paid off within a year OR within the companys operating cycle.

Non-current liabilities

________ are long term and are paid in a time frame that is longer than the operating cycle or year (paid after a year).

classified balance sheet

Liabilities are found on the ________.

cash equivalent

The ________ is how much we own or borrow, which is the initial amount of the liability.

creditors

When a liability increases, more is owed to ________.

Accounts

________ Payable: Increases when goods/services are received on credit (you owe money). Decreases when payment is made. Has a normal credit balance.

Accrued

________ liabilities are incurred, but not paid. They're usually used to purchase supplies or inventory. Examples are advertising, interest, and payroll.

Payroll deductions

________ can be required by law or voluntarily requested by employees. Both create a current liability.

Income tax
FICA tax
Charitable donations

Examples of payroll deductions:

They pay the employees.
They pay taxes for the luxury of having their employees.

Two things happen when employers pay their employees:

One to pay employee and one to pay state or fed.

The two journal entries for when the employer gives a check to their employee.

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Equation for taxable income:

Notes Payable

________ is a current liability with a promissory note.

Establish the note, incur accruing interest, record the interest paid, and record the principal paid.

The process of a Notes Payable:

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Equation for calculating interest:

Sales Tax Payable

________ are payments from customers at the time of sale of the goods/services. The liability generated is due to the state government.

Deferred revenue

________ means we have received cash, but we still owe the good or service to the customer. Once the good or service is delivered, the liability decreases.

within 12 months

The current portion of long term debt is due ________.

in over 12 months

Non-current portion of long term debt is due ________.

within a year

A long term liability must be paid ________.

Long term Notes Payable, Deferred income taxes, and Bonds Payable.

Examples of long term liabilities:

Deferred income taxes

________ are found on the balance sheet and is the amount a company will at some point pay.

Bonds

________ are considered a long term liability for companies and an investment for bondholders.

The New York Bond Exchange

Bonds are tradable on established exchanges like _________.

Maturity date

On the top of the bond, what is the name for the due date?

Face value

On the top of the bond, what is the name for the amount payable on the maturity date?

Stated interest rate

On the top of the bond, what is the name of the amount of interest you can expect to receive?

Bond pricing

________ is based on what the investors are willing to pay on the issue date.

$1,000

Face value is usually _____ for bonds.

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Equation for carrying value (premium):

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Equation for carrying value (discount)

premium

A bond that is issued over the face value of a bond is a(n) ________.

discount

A bond that is issued under the face value of a bond is a(n) ________.

bonds premium

With a ________, the issuer receives more money on the issue date than the maturity date.

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Equation to calculate premium:

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Equation to calculate interest expense (premium):

bonds discount

With a ________, the company receives less cash on the issue date than whats received on the maturity date.

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Equation to calculate discount:

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Equation to calculate interest expense (discount)

retiring

Payment of the bond on the maturity date is ________ the bond.

retired early

Bonds can be ________, which decreases future interest expense and increases net income.

Pays cash for the bond.
Decreases the Bonds Payable.
Reports a gain or loss.

When bonds are retired early, the company:

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Equation to calculate loss or gain on the retirement:

Positive number means a gain.
Negative number means a loss.

How to determine gain or loss on retirement:

Contingent liabilities

________ are liabilities that came from past transactions and have an unknown future outcome.

debt-to-asset

The ________ shows how many assets are financed by liabilities.

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Equation for the Debt-to-Assets Ratio:

times interest earned ratio

The ________ will tell us if resources will cover interest cost.

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Equation for the Times Interest Earned ratio: