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Chapter 10 Liabilities ( 負債 )

Chapter 10 Liabilities ( 負債 ). Instructor: Chih-Liang Liu Department of Industrial and Business Management Chang Gung University. Learning Objectives Explain a current liability ( 流動負債 ) , and identify the major types of current liabilities.

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Chapter 10 Liabilities ( 負債 )

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  1. Chapter 10 Liabilities (負債) Instructor: Chih-Liang Liu Department of Industrial and Business Management Chang Gung University

  2. Learning Objectives • Explain a current liability (流動負債), and identify the major types of current liabilities. • Describe the accounting for notes payable (應付票據). • Explain the accounting for other current liabilities. • Explain why bonds (債券) are issued, and identify the types of bonds.

  3. Cont. • Prepare the entries for the issuance of bonds and interest expense. • Describe the entries when bonds are redeemed (贖回). • Describe the accounting for long-term notes payable. • Identify the methods for the presentation and analysis of non-current liabilities.

  4. Preview of Chapter 10

  5. Current Liabilities • Current liability(流動負債) • A debt that the company expects to pay within one year or the operating cycle (營業週期), whichever is longer. • Most companies pay current liabilities by using current assets. Current liabilities include notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes payable, salaries and wages payable, and interest payable.

  6. Current Liabilities Question The time period for classifying a liability as current is one year or the operating cycle, whichever is: • longer • shorter • probable • possible

  7. Current Liabilities Notes Payable (應付票據) • Recorded obligation in the form of written notes (書面承諾債權證明). • Usually require the borrower (借款人) to pay interest. • Issued for varying periods of time. • Those due (到期) for payment within one year of the statement of financial position date are usually classified as current liabilities (流動負債).

  8. Current Liabilities • Illustration: Hong Kong National Bank agrees to lend HK$100,000 on September 1, 2014, if C.W. Co. signs a HK$100,000, 12%, four-month note maturing on January 1. • Instructions • Prepare the journal entry on September 1. • Prepare the adjusting journal entry on December 31, assuming monthly adjusting entries have not been made. • Prepare the journal entry at maturity (到期日) (January 1, 2015).

  9. Current Liabilities a) Prepare the journal entry on September 1. Cash 100,000 Notes Payable 100,000 b) Prepare the adjusting journal entry on Dec. 31. Interest Expense 4,000 Interest Payable 4,000 HK$100,000 x 12% x 4/12 = HK$4,000

  10. Current Liabilities • In the Dec. 31 financial statements. • S/FP I/S • Current Liabilities: Other Income and Expense: • Notes Payable 100,000 Interest Expense 4,000 • Interest Payable 4,000 c) Prepare the journal entry at maturity (January 1, 2015). Notes Payable 100,000 Interest Payable 4,000 Cash 104,000

  11. Current Liabilities Sales Tax Payable (應付銷售稅 ) • Sales taxes are expressed as a stated percentage of the sales price. • Either rung up separately or included in total receipts. • Retailer collects tax from the customer. • Retailer remits the collections to the government’s department of revenue.

  12. Current Liabilities Illustration: The March 25 cash register reading for Cooley Grocery shows sales of NT$10,000 and sales taxes of NT$600 (sales tax rate of 6%), the journal entry is: Cash 10,600 Sales Revenue 10,000 Sales Tax Payable 600

  13. Sales Tax Payable Customer Sales price = $10,000 Sale tax = 6%  10,000 = 600 Pay Cash = 600 Cooley (Cash=10,600) Taxing Agency Cash 10,600 Sales Revenue 10,000 Sales Taxes Payable 600 Sales Taxes Payable 600 Cash 600

  14. Current Liabilities Illustration: The March 25 Cooley Grocery rings up total receipts of $10,600, sales amount is $10,600/1.06=$10,000, sales tax amount is 10,600-10,000=$600 Cash 10,600 Sales 10,000 Sales Tax Payable 600

  15. Current Liabilities Unearned Revenue (預收收入) Revenues that are received before the company delivers goods or provides services. • Company debits Cash, and credits a current liability account (Unearned Revenue). • When the company earns the revenue, it debits the Unearned Revenue account, and credits a Revenue account.

  16. Current Liabilities Illustration: Busan IPark (KOR) sells 10,000 season football tickets at W 50,000 each for its five-game home schedule. The club makes the following entry for the sale of season tickets (in thousands of W): Aug. 6 Cash 500,000 Unearned Ticket Revenue 500,000 As each game is completed, Busan IPark records the revenue earned. Sept. 7 Unearned Ticket Revenue 100,000 Ticket Revenue 100,000

  17. Current Liabilities Current Maturities of Long-Term Debt (長期負債一年內到期部分) • Portion of long-term debt that comes due in the current year. • Considered a current liability. • No adjusting journal entry required.

  18. Statement Presentation and Analysis Presentation • Current liabilities are presented after non-current liabilities on the statement of financial position. • A common method of presenting current liabilities is to list them by order of magnitude, with the largest ones first.

  19. Statement Presentation and Analysis Illustration 10-3

  20. Statement Presentation and Analysis Analysis Illustration 10-4 Liquidity (流動性) refers to the ability to pay maturing obligations and meet unexpected needs for cash. The current ratio (流動比率) permits us to compare the liquidity of different-sized companies and of a single company at different times. Illustration 10-5

  21. Non-Current Liabilities Obligations that are expected to be paid after one year. Bond (債券) Basics • A form of interest-bearing (附息) notes payable. • To obtain large amounts of long-term capital. • Three advantagesover ordinary shares: • Shareholder control is not affected. • Tax savings result. • Earnings per share may be higher.

  22. Bond Basics Effects on earnings per share—equity vs. debt. Illustration 10-7 <

  23. Bond Basics One disadvantages in using bonds: • Firm must pay interest on a periodic basis. • Firm repay the principal (本金) at the due date.

  24. Bond Basics Question The major disadvantages resulting from the use of bonds are: • that interest is not tax deductible and the principal must be repaid. • that the principal is tax deductible and interest must be paid. • that neither interest nor principal is tax deductible. • that interest must be paid and principal repaid.

  25. Bond Basics Types of Bonds

  26. Bond Basics • Types of Bonds • Secured bonds (擔保) have specific assets of the issuer pledged (保證)as collateral (擔保品) for the bonds. • Unsecured (無擔保) (debenture;信用公司債) bonds are issued against the general credit (信用) of the borrower.

  27. Bond Basics • Types of Bonds • Term bonds (定期還本債券): 在未來某一特定日到期的債券 • Serial bonds (分期還本債券): 到期以分期還本的債券

  28. Bond Basics • Types of Bonds • Registered bonds (記名債券): 債券上記載所有人的名字，且利息的支付採開立支票給債券持有人 • Bearer bonds (無記名債券) (or coupon bonds; 息票債券): Bonds are not registered.

  29. Bond Basics • Types of Bonds • Convertible (可轉換債券): bonds can be converted into ordinary shares at the bondholder’s option. • Callable bonds (可贖回債券): issuing company can retire (贖回) at a stated dollar amount prior to maturity.

  30. Bond Basics Issuing Procedures • Government laws grant (賦予) corporations power to issue bonds. • Board of directors and shareholders must approve (核淮) bond issues (bond authorization exceeds bonds issues). • Board of directors must stipulate (明訂) number of bonds to be authorized (核淮), total face value (總面額), and contractual interest rate (票面利率). • Terms of the bond are set forth in a legal document called a bond indenture (債券合約). • Issuing company arranges for printing of bond certificates (債券憑證).

  31. Bond Basics Issuing Procedures • Represents a promise to pay: • face value (面值) at designated maturity date (到期日), plus • periodic interest at a contractual (stated)interest rate (票面利率) on the maturity amount (face value). • Interest payments usually made semiannually.

  32. Bond Basics Issuing Procedures Governmental laws Grant Board of directors Shareholders Corporations Approve Approve 1. Number of bonds to be authorized 2. Total face value 3. Interest rate Authorizing Bonds issue

  33. Bond Basics Issuer of Bonds Illustration 10-8 Maturity Date 2017 DUE 2017 DUE 2017 Contractual Interest Rate Face or Par Value

  34. Bond Basics Bond Trading • Bondholders can sell their bonds, at any time, at the current market price on national securities exchanges. • Bond prices are quoted as a percentage of the face value (面額百分比), which is usually $1000. Application (1) What is the price of a $1,000 bond trading at 95 1/4? (2) What is the price of a $1,000 bond trading at 101 7/8? $952.50 $1,018.75

  35. Bond Basics Bond Trading • Bondholders can sell their bonds, at any time, at the current market price on national securities exchanges. • Bond prices are quoted as a percentage of the face value. For example, a $1,000 bond with a quoted price of 97 means that the selling price of the bond is 97% of face value, or $970. • Newspapers and the financial press publish bond prices and trading activity daily. Illustration 10-9

  36. Bond Basics Bond Trading • A corporation makes journal entries only when it issues or buys back bonds, or when bondholders exchange convertible bonds into ordinary shares.

  37. Bond Basics Determining the Market Value of Bonds • Market value is a function of the three factors that determine present value (time value of money): • amounts (Ex. one million dollars) to be received , • length of time (Ex. 20 years) until the amounts are received, and • market rate of interest.

  38. Accounting for Bond Issues • Corporation records bond transactions when it • issues (sells), • retires (buys back) bonds and • when bondholders convert bonds into ordinary shares. • NOTE: If bondholders sell their bond investments to other investors, the issuing firm receives no further money on the transaction, nor does the issuing corporation journalize the transaction.

  39. Accounting for Bond Issues Issuing Bonds at Face Value Illustration:On January 1, 2014, Candlestick Inc. issues €100,000, five-year, 10% bonds at 100 (100% of face value). The entry to record the sale is: Jan. 1 Cash 100,000 Bonds Payable 100,000

  40. Issuing Bonds at Face Value Illustration: On January 1, 2014, Candlestick Inc. issues €100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the payment of interest on July 1, 2014, assume no previous accrual. July 1 Interest Expense 5,000 Cash 5,000 (€100,000 x 10% x 6/12)

  41. Issuing Bonds at Face Value Illustration:On January 1, 2014, Candlestick Corporation issues €100,000, five-year, 10% bonds at 100 (100% of face value). Assume that interest is payable semiannually on January 1 and July 1. Prepare the entry to record the accrual of interest on December 31, 2014, assume no previous accrual. Dec. 31 Interest Expense 5,000 Interest Payable 5,000

  42. Accounting for Bond Issues Issue at Par (平價), Discount (折價), or Premium (溢價)? Illustration 10-10 Bond Contractual Interest Rate of 10%

  43. Accounting for Bond Issues Issuing Bonds at a Discount (折價發行) Illustration:On January 1, 2014, Candlestick, Inc. sells €100,000, five-year, 10% bonds for €92,639 (92.639% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is: Jan. 1 Cash 92,639 Bonds Payable 92,639

  44. Issuing Bonds at a Discount Statement Presentation Illustration 10-11 Carrying value or book value The issuance of bonds below face value—at a discount—causes the total cost of borrowing to differ from the bond interest paid. The reason: Borrower is required to pay the difference between the issuance price and face value—the discount—at the maturity date. Thus, the discount is considered to bean additional cost of borrowing.

  45. Issuing Bonds at a Discount Total Cost of Borrowing Illustration 10-12 Illustration 10-13

  46. Accounting for Bond Issues Issuing Bonds at a Premium (溢價發行) Illustration: On January 1, 2014, Candlestick, Inc. sells €100,000, five-year, 10% bonds for €108,111 (108.111% of face value). Interest is payable on July 1 and January 1. The entry to record the issuance is: Jan. 1 Cash 108,111 Bonds Payable 108,111

  47. Issuing Bonds at a Premium Statement Presentation Illustration 10-14 The sale of bonds above face value causes the total cost of borrowing to be less than the bond interest paid. The reason: The borrower is not required to pay the bond premium at the maturity date of the bonds. Thus, the bond premium is considered to be a reduction in the cost of borrowing.

  48. Issuing Bonds at a Premium Total Cost of Borrowing Illustration 10-15 Illustration 10-16

  49. Accounting for Bond Retirements Redeeming Bonds at Maturity (到期日贖回債券) Assuming that the company pays and records separately the interest for the last interest period, Candlestick records the redemption of its bonds at maturity as follows: Bond Payable 100,000 Cash 100,000

  50. Accounting for Bond Retirements Redeeming Bonds before Maturity (到期前贖回) • When bonds are retired before maturity, it is necessary to: • eliminate carrying value (帳面價值) of bonds at redemption date; • record cash paid; and • recognize gain or loss on redemption. The carrying value of the bonds is the face value of the bonds adjusted for the bond discount or bond premium amortized up to the redemption date.

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