Face add bond premium bonds payable

Reporting and Analyzing Liabilities

Assets = Liabilities + Equity

Liabilities as a Source of Financing

they relate

Current Liabilities

 Short-term in nature
 Due within one year
 Categories of current obligations
 Current operating liabilities
 Accounts payable
 Accrued liabilities
 Deferred performance liabilities
 Current nonoperating liabilities
 Short-term interest-bearing debt
 Current maturities of long-term debt
 Most create a corresponding impact on selling, general and administrative expenses on the income statement

account.

Selling Inventory on Account

Recording Payments Received on Account

Recording a Payment to a Creditor

Cash Discounts

 Incentives granted to buyers to encourage payment within a specified period of time
 Part of credit terms
 Stated as a percentage of the purchase price

A buyer purchases $1,000 of merchandise on June 1

with terms of 2/10, n/30. Payment is made on June 9.

	$20 extra to pay 20 days later		13
	$20 ÷ 20 days = $1 per day
	or $365 for one year
	$365 ÷ $980 = 37.2% per year!
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n/30.

period ends.

©2020 Cambridge Business Publishers 17

Accrued Liabilities

Accounting for Accruals

period.

Contingent Liabilities

 Not all liabilities are certain
 Criteria to be met before recognizing:

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 What are warranties?

 Commitments made by manufacturers to their customers to repair or replace defective products within a specified time period

Estimating Warranty Accruals

Warranty Repairs / Replacement

Disclosure for Warranties
Excerpt from Apple’s financial statement notes

presented in its 2018 10-K annual report:

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Current Financial Liabilities

 Financing is often permanent and seasonal for seasonal operations

Example of a company with higher seasonal sales in summer

 Bank provides a commitment to lend up to a given level with the understanding that the amounts borrowed are repaid in full sometime during the year

 Evidenced by an interest-bearing note

Calculating Interest

Principal x Annual Rate x Portion of Year

Outstanding

each quarter (April 1, July 1, October 1, and January 1).

©2020 Cambridge Business Publishers 37

Debt Securities

Explain and illustrate the pricing of long-term nonoperating
liabilities.

Valuing Bonds Issued at Par

$400,000 × 8% × 6/12 = $16,000

Interest rate per period:
8% annual rate ÷ 2 payments per year = 4% per period

Valuing Bonds Issued at a Discount

$400,000 × 8% × 6/12 = $16,000

Market interest rate per period:

10% annual rate / 2 payments per year = 5% per period

Investors wish to value a bond with a face amount of $400,000, an 8% annual coupon rate, 6% market rate, interest payable semiannually, and a maturity of 5 years.

Step 1: Calculate the interest payment.

Step 2: Calculate the present value (PV) of the cash

flows.

PV of interest payments $ $16,000 x 8.53020 = $136,483

PV of annuity for 10 periods @ 3% per period (Table A.3)

Investors wish to value a bond with a face amount of $400,000, an 8% annual coupon rate, 6% market rate, interest payable semiannually, and a maturity of

PV = unknown, the amount to solve for

PMT = the periodic interest payment: $400,000 × 8% × 6/12 = $16,000

Investors wish to value a bond with a face amount of $400,000, an 8% annual coupon rate, 10% market rate, interest payable semiannually, and a maturity

PMT = the periodic interest payment: $400,000 × 8% × 6/12 = $16,000

FV = the principal amount of the debt: $400,000 given

$400,000 bonds	Interest payments
sold at par			=
$160,000

 Offers debt
investment to the
public

 Referred to as a
tombstone

©2020 Cambridge Business Publishers

Issuing Bonds at Par
$400,000 bonds with 8% coupon rate, issued at par:

Issuing Bonds at a Premium
$400,000 bonds with 8% coupon rate, issued at a premium, 6%

market rate:

Reporting Bonds
on the Balance Sheet

Bonds payable, face $400,000

The $16,000 interest payment was made on the $400,000, 8%

bonds, issued at $369,113 (10% market rate).

Financial Statement Effects of Bond Repurchase

 Bonds trade in secondary markets between

(indenture)

 Call provision gives the company the right to repurchase its bonds

Financial Statement Footnotes
Verizon presented a schedule in its note disclosure of

 Interest must be excluded from operating activities section of cash flows statement and from net
operating profit when performing a financial
analysis.

 Interest income

 Interest-bearing bonds and notes

 A measure of solvency

 Measures the corporation’s financial leverage

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©2020 Cambridge Business Publishers 69

Verizon in Context
Debt-to-Equity Ratio

©2020 Cambridge Business Publishers 70

Times Interest Earned (TIE)
 Measures how many times interest expense is

Debt Ratings

 Agencies include

 Moody’s Investors Service

major bond rating services:

Collateral
 Security in the form of assets provided for debt
 Debt holder is in a preferred position with secured debt

Covenants
 Restrictions specified in the debt agreement
 Provide debt holder a means of control over the issuer’s operations

Financial Accounting Sixth Edition

Cambridge Business