Kế toán tài chính 2 - Chapter 12: Accounting for liabilities

CHAPTER 12ACCOUNTING FOR LIABILITIESINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Wyegandt Kieso Describe the nature, type, and valuation of current liabilities.Identify various types of bond issues. Describe the accounting valuation for bonds at date of issuance. Describe the accounting procedures for the extinguishment of debt. Identify the criteria used to account for and disclose gain and loss contingencies.Explain the accounting for different types of loss contingencies.Explain the reporting of off–balance-sheet financing arrangements.Indicate how to present and analyze liabilities and contingencies.Learning ObjectivesAccounting for LiabilitiesCurrent LiabilitiesLong-Term DebtSpecial IssuesWhat is a liability?What is a current liability?Issuing bondsTypes of bondsValuation of bondsContingenciesOff–balance-sheet financingPresentation and analysisWhat is a Liability?FASB, defines liabilities as: “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”What is a Current Liability?Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.”Typical Current Liabilities:Accounts payable.Notes payable.Current maturities of long-term debt.Dividends payable.Unearned revenues.Sales taxes payable.Income taxes payable.Employee-related liabilities.LO 1 Describe the nature, type, and valuation of current liabilities.Balances owed to others for goods, supplies, or services purchased on open account.Accounts Payable (trade accounts payable)What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Arise because of time lag between receipt of goods or services and the payment for them. The terms of the sale (e.g., 2/10, n/30) state period of extended credit.Written promises to pay a certain sum of money on a specified future date.Notes PayableWhat is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Arise from purchases, financing, or other transactions.Notes classified as short-term or long-term.Notes may be interest-bearing or zero-interest-bearing.Exercise: (Accounts and Notes Payable) The following are selected 2008 transactions of Sean Astin Corporation.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Sept. 1 - Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system.Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in payment of account.Oct. 1 - Borrowed $50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $54,000 note.Sept. 1 - Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Sept. 1 Purchases 50,000 Accounts payable 50,000Oct. 1 - Issued a $50,000, 12-month, 8% note to Encino in payment of account.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Oct. 1 Accounts payable 50,000 Notes payable 50,000Dec. 31 Interest expense 1,000 Interest payable 1,000 ($50,000 X 8% X 3/12) Oct. 1 - Borrowed $50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $54,000 note.What is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.Oct. 1 Cash 50,000 Discount on notes payable 4,000 Notes payable 54,000Dec. 31 Interest expense 1,000 Discount on notes payable 1,000 ($4,000 x 3/12) Exclude long-term debts maturing currently as current liabilities if they are to be:Current Maturities of Long-Term DebtWhat is a Current Liability?LO 1 Describe the nature, type, and valuation of current liabilities.1. Retired by assets accumulated that have not been shown as current assets,2. Refinanced, or retired from the proceeds of a new debt issue, or3. Converted into capital stock.Amount owed by a corporation to its stockholders as a result of board of directors’ authorization.Dividends PayableWhat is a Current Liability?Generally paid within three months.Undeclared dividends on cumulative preferred stock not recognized as a liability.Dividends payable in the form of shares of stock are not recognized as a liability. Reported in equity.LO 1 Describe the nature, type, and valuation of current liabilities.Payment received before delivering goods or rendering services?Unearned RevenuesWhat is a Current Liability?Unearned and Earned Revenue AccountsIllustration 12-2LO 1 Describe the nature, type, and valuation of current liabilities.Exercise: Game Pro Magazine sold 10,000 annual subscriptions on August 1, 2008, for $18 each. Prepare Game Pro’s August 1, 2008, journal entry and the December 31, 2008, annual adjusting entry.What is a Current Liability?Aug. 1 Cash 180,000 Unearned revenue 180,000 (10,000 x $18) Dec. 31 Unearned revenue 75,000 Subscription revenue 75,000 ($180,000 x 5/12 = $75,000) LO 1 Describe the nature, type, and valuation of current liabilities.Long-Term DebtLong-term debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer.Examples: Bonds payableNotes payableMortgages payablePension liabilities Lease liabilitiesLong-term debt has various covenants or restrictions.Issuing BondsLO 2 Identify various types of bond issues.Bond contract known as a bond indenture.Represents a promise to pay: sum of money at designated maturity date, plusperiodic interest at a specified rate on the maturity amount (face value).Paper certificate, typically a $1,000 face value. Interest payments usually made semiannually. Purpose is to borrow when the amount of capital needed is too large for one lender to supply.Types of BondsLO 2 Identify various types of bond issues.Common types found in practice:Secured and Unsecured (debenture) bonds,Term, Serial, and Callable bonds,Convertible bonds, Commodity-backed bonds, Deep-discount bonds (Zero-interest debenture bonds),Registered bonds and bearer or coupon bonds,Income and Revenue bonds.Valuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Between the time the company sets the terms and the time it issues the bonds, the market conditions and the financial position of the issuing corporation may change significantly. Such changes affect the marketability of the bonds and thus their selling price.The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.Interest RatesStated, coupon, or nominal rate = The interest rate written in the terms of the bond indenture. Market rate or effective yield = rate that provides an acceptable return on an investment commensurate with the issuer’s risk characteristics. Rate of interest actually earned by the bondholders.Valuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.How do you calculate the amount of interest that is actually paid to the bondholder each period?(Stated rate x Face value of the bond)How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds?(Market rate x Carrying value of the bond)Valuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.1- Depends on market rate of interest2- Computation of selling price: - PV of maturity value, plus - PV of interest payments, at what rate? - Market rate of interest3- Semi-annual interest paying bonds: - Require doubling the periods - Halving the interest rateValuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Calculating the Selling Price of a BondBonds Sold AtMarket Interest6%8%10%PremiumFace ValueDiscountValuation of Bonds – Discount and PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Assume Stated Rate of 8%Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, with a stated interest rate of 8%. Interest paid annually on Dec. 31. Calculate the issue price of the bonds, market interest rate of 8%.LO 3 Describe the accounting valuation for bonds at date of issuance.Market Rate 8% (PV for 3 periods at 8%)Bonds Issued at ParIllustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interest rate of 8%, and market rate of 8%. Bonds Issued at ParLO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Stated rate = 8%. Market rate = 8%. Bonds Issued at ParLO 3 Describe the accounting valuation for bonds at date of issuance.Journal entries for 2007:1/1/07 Cash 100,000 Bonds Payable 100,00012/31/07 Interest Expense 8,000 Cash 8,000Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 10%.Bonds Issued at a DiscountMarket Rate 10% (PV for 3 periods at 10%)LO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interest rate of 8%, and market rate of 10%. ** roundingBonds Issued at a DiscountLO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Stated rate = 8%. Market rate = 10%. Journal entries for 2007:1/1/07 Cash 95,027 Discount on Bonds payable 4,973 Bonds Payable 100,00012/31/07 Interest expense 9,503 Discount on Bonds Payable 1,503 Cash 8,000Bonds Issued at a DiscountLO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 6%.Market Rate 6% (PV for 3 periods at 6%)Bonds Issued at a PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2007, a stated interest rate of 8%, and market rate of 6%. Bonds Issued at a PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Illustration: Stated rate = 8%. Market rate = 6%. Journal entries for 2007:1/1/07 Cash 105,346 Premium on Bonds Payable 5,346 Bonds Payable 100,00012/31/07 Interest Expense 6,321 Premium on Bonds Payable 1,679 Cash 8,000Bonds Issued at a PremiumLO 3 Describe the accounting valuation for bonds at date of issuance.Discount on bonds payable is a liability valuation account, that reduces the face amount of the related liability (contra-account).Classification of Discount and PremiumValuation of Bonds – Discount and PremiumPremium on bonds payable is a liability valuation account, that adds to the face amount of the related liability (adjunct account). LO 3 Describe the accounting valuation for bonds at date of issuance.Unamortized bond issue costs are treated as a deferred charge and amortized over the life of the debt.Costs of Issuing BondsLO 3 Describe the accounting valuation for bonds at date of issuance.Extinguishment before Maturity DateReacquisition price > Net carrying amount = LossNet carrying amount > Reacquisition price = GainAt time of reacquisition, unamortized premium or discount, and any costs of issue applicable to the bonds, must be amortized up to the reacquisition date.Extinguishment of DebtLO 4 Describe the accounting for the extinguishment of debt.Illustration: Three year 8% bonds of $100,000 issued on Jan. 1, 2007, are recalled at 105 on Dec. 31, 2008. Expenses of recall are $2,000. Market interest on issue date was 8%. Extinguishment of DebtLO 4 Describe the accounting for the extinguishment of debt.Account Balances at Dec. 31, 2008: Bonds payable = $98,183 Discount on bonds payable ($4,973–1,503-1,653) = 1,817Illustration: Three year 8% bonds of $100,000 issued on Jan. 1, 2007, are recalled at 105 on Dec. 31, 2008. Expenses of recall are $2,000. Market interest on issue date was 8%. Extinguishment of DebtLO 4 Describe the accounting for the extinguishment of debt.Journal entry at Dec. 31, 2007: Bonds payable 100,000 Loss on extinguishment 8,817 Cash 107,000 Discount on bonds payable 1,817Reacquisition price = $105,000 + 2,000 = $107,000“An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.”*Contingencies*“Accounting for Contingencies,” Statement of Financial Accounting Standards No. 5 (Stamford, Conn.: FASB, 1975), par. 1LO 5 Identify the criteria used to account for and disclose gain and loss contingencies.Gain ContingenciesTypical Gain Contingencies are:Possible receipts of monies from gifts, donations, and bonuses.Possible refunds from the government in tax disputes.Pending court cases with a probable favorable outcome.Tax loss carryforwards (Chapter 15).LO 5 Identify the criteria used to account for and disclose gain and loss contingencies.Gain contingencies are not recorded.Disclosed only if probability of receipt is high.Loss ContingenciesLO 5 Identify the criteria used to account for and disclose gain and loss contingencies.The likelihood that the future event will confirm the incurrence of a liability can range from probable to remote.Contingent LiabilityFASB uses three areas of probability:Probable.Reasonably possible.Remote.AccountingProbabilityAccrueFootnoteIgnoreProbableReasonablyPossibleRemoteLoss ContingenciesLO 5 Identify the criteria used to account for and disclose gain and loss contingencies.Exercise: Justice League Inc. is involved in a lawsuit at December 31, 2008. (a) Prepare the December 31 entry assuming it is probable that Justice League will be liable for $700,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Justice League will be liable for any payment as a result of this suit.(a) Lawsuit loss 700,000 Lawsuit liability 700,000Loss ContingenciesLO 5 Identify the criteria used to account for and disclose gain and loss contingencies.(b) No entry is necessary. The loss is not accrued because it is not probable that a liability has been incurred at 12/31/08.Loss ContingenciesCommon loss contingencies:Litigation, claims, and assessments. Guarantee and warranty costs.Environmental liabilities.Self-insurance risks.LO 5 Identify the criteria used to account for and disclose gain and loss contingencies.Loss ContingenciesCompanies must consider the following factors, in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments.Litigation, Claims, and AssessmentsTime period in which the action occurred.Probability of an unfavorable outcome.Ability to make a reasonable estimate of the loss.LO 6 Explain the accounting for different types of loss contingencies.Loss ContingenciesPromise made by a seller to a buyer to make good on a deficiency of quantity, quality, or performance in a product.Guarantee and Warranty CostsIf it is probable that customers will make warranty claims and a company can reasonably estimate the costs involved, the company must record an expense.LO 6 Explain the accounting for different types of loss contingencies.Loss ContingenciesLO 6 Explain the accounting for different types of loss contingencies.Exercise: Frantic Factory provides a 2-year warranty with one of its products which was first sold in 2008. In that year, Frantic spent $70,000 servicing warranty claims. At year-end, Frantic estimates that an additional $500,000 will be spent in the future to service warranty claims related to 2008 sales. Prepare Frantic’s journal entry to record the $70,000 expenditure, and the December 31 adjusting entry.2008 Warranty Expense 70,000 Cash 70,000 12/31/08 Warranty Expense 500,000 Warranty Liability 500,000Loss ContingenciesA company must recognize an asset retirement obligation (ARO) when it has an existing legal obligation associated with the retirement of a long-lived asset and when it can reasonably estimate the amount of the liability.Environmental LiabilitiesLO 6 Explain the accounting for different types of loss contingencies.Loss ContingenciesSome contingencies are not insurable or the insurance rates are prohibitive (e.g., earthquakes and riots). Self-insurance is not insurance, but risk assumption.Self-InsuranceLO 6 Explain the accounting for different types of loss contingencies.Illustration 12-8An attempt to borrow monies in such a way to prevent recording the obligations.Off-Balance-Sheet FinancingLO 7 Explain the reporting of off-balance-sheet financing arrangements.Different Forms:Non-Consolidated SubsidiarySpecial Purpose Entity (SPE)Operating LeasesPresentation and AnalysisPresentation of Current LiabilitiesUsually reported at their full maturity value.Difference between present value and the maturity value is considered immaterial.LO 8 Indicate how to present and analyze liabilities and contingencies.Presentation of Long-Term DebtNote disclosures generally indicate the Nature of the liabilities, Maturity dates, Interest rates, Call provisions, Conversion privileges, Restrictions imposed by the creditors, and Assets designated or pledged as security.Presentation and AnalysisLO 8 Indicate how to present and analyze liabilities and contingencies.Must disclose future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next five years.Presentation and AnalysisLO 8 Indicate how to present and analyze liabilities and contingencies.Presentation of ContingenciesDisclosure should include:Nature of the contingency.An estimate of the possible loss or range of loss. Presentation and AnalysisAnalysis of Current LiabilitiesLiquidity regarding a liability is the expected time to elapse before its payment. Two ratios to help assess liquidity are:Current AssetsCurrent Liabilities Current Ratio =Cash + Marketable Securities + Net ReceivablesCurrent Liabilities Acid-Test Ratio =LO 8 Indicate how to present and analyze liabilities and contingencies.Exercise: (Ratio Computations and Discussion) Sprague Company has been operating for several years, and on December 31, 2008, presented the following balance sheet.Presentation and AnalysisCompute the current ratio:$210,00080,000 =2.63 to 1Compute the acid-test ratio:$115,00080,000 =1.44 to 1LO 8 Indicate how to present and analyze liabilities and contingencies.Analysis of Long-Term DebtTwo ratios that provide information about debt-paying ability and long-run solvency are:Total debtTotal assets Debt to total assets =The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.1.Presentation and AnalysisLO 8 Indicate how to present and analyze liabilities and contingencies.Analysis of Long-Term DebtTwo ratios that provide information about debt-paying ability and long-run solvency are:Income before income taxes and interest expenseInterest expense Times interest earned =Indicates the company’s ability to meet interest payments as they come due.2.Presentation and AnalysisLO 8 Indicate how to present and analyze liabilities and contingencies.Copyright © 2008 John Wiley & Sons, Inc. 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