Chapter 8 Summary

1. Current & Long Term Liabilities Chapter 8 Summary

2. Current Liabilities • Obligations of an Organization that are due to be paid within one year or one accounting period (whichever is greater) • Recorded at: $ value of obligation • Two Types: • $ value known • $ value must be estimated

3. $ Value Known • Accounts Payable • Amounts owed from purchases made on account • Other Payables • From Accrual process • Salary Expense • Interest Expense

4. Note Payable • Obligation we owe lender • Includes both Principal & Interest • Record 3 things: • Initial Obligation • Periodic Interest • Final Payoff

5. Warranty Payable • $ Value unknown • Matching says…. • Estimate Warranty Expense based on % of expected warranty claims from sales • Debit Warranty Expense • Credit Warranty Payable • As the obligations for the warranties are fulfilled we reduce the liability • Debit Warranty Payable • Credit (it depends) • Cash (if we are giving customers back their $) • Inventory (if we are giving customers replacement products)

6. Bonds  • Bond Payable is a long-term obligation • Similar to Notes Payable • Record initial obligation • Record periodic interest (semi-annually) • Record final payoff

7. Bond Terminology • Face Amount, Par value • Amount on Bond Document • This is always the amount of the obligation that we owe the investors who purchased the bond • Amount Received • This is the cash $ we received from investors • Bond interest rate, stated rate • The interest rate that is part of the bond contract • This is the interest rate x the face amount of the bond that we will pay our investors semi-annually – this is our obligation • Market rate, effective interest rate • The prevailing interest rate an investor could earn in the “market” • This is the interest rate x carrying bond amount, our interest expense (the cost of borrowing the $) that we record on our income statements • Carrying Bond Amount • Face Value of the bond – Discount on Bond Payable (a Contra-Liability account) or • Face Value of the bond + Premium on Bond Payable • Amortizing Discount or Premium • Periodic reduction of Discount or Premium until bond matures • Two Methods • Effective Interest • Straight-Line

8. Bonds issued at Par • Record initial obligation • Debit Cash • Credit Bonds Payable • Record periodic Interest • Debit Interest Expense • Credit Cash (or Interest Payable) • Record final payoff • Debit Bond Payable • Credit Cash

9. Bonds Issued at a Discount • Initial Obligation • Debit Cash • Debit Discount on Bond Payable • Credit Bonds Payable • Periodic Interest • Interest Expense • Credit Discount on Bond Payable • Credit Cash or Interest Payable • Final Payoff • Debit Bonds Payable • Credit Cash

10. Bonds Issued at Premium • Initial Obligation • Debit Cash • Credit Premium on Bond Payable • Credit Bond Payable • Periodic Interest • Debit Interest Expense • Debit Premium on Bond Payable • Credit Cash (or Interest Payable) • Final Payoff • Debit Bond Payable • Credit Cash

11. Amortization Methods • Effective Interest • Carrying Amount of Bond x market rate % x 6 / 12 (when calculating for 6 months) • Debit to Interest Expense • Face value of bond x stated rate % x 6 /12 • Credit Cash (Interest payable) • Difference is amortization of premium or discount • Straight Line • Determine Discount or Premium • Divide this amount by term of Bond x # of payments per year (usually 2) • Amortization amount • Journal Entry remains the same period to period

12. Times Interest Earned Ratio • TIE = Operating Income / Interest Expense • Operating Income = Sales – CGS – Operating Expenses