Face add bond premium bonds payable
Reporting and Analyzing Liabilities
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2 |
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Assets = Liabilities + Equity
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Liabilities as a Source of Financing
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they relate
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Learning Objective | 1 |
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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
$ | 3,453 | $ | 2,645 | |
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$ | 21,232 | $ | 19,593 | |
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$ | 8,352 | $ | 8,102 |
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$ | 33,037 | $ | 30,340 |
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account.
(1) | 800 | |
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800 | |
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Selling Inventory on Account
2) |
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(2a) |
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9 | ||
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1,500 | |||
600 | ||||
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1,500 | |||
(2b) | ||||
600 | ||||
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Recording Payments Received on Account
(3) |
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1,100 |
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Accounts receivable (–A) | 1,100 | |
Recording a Payment to a Creditor
4) |
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Balance Sheet | Income Statement | |||||
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(4) | 800 | 11 |
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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 priceA buyer purchases $1,000 of merchandise on June 1
with terms of 2/10, n/30. Payment is made on June 9.
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$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.
(1) | (1) | 156.80 |
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14 | |
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Accounts payable (+L) | 156.80 | ||||
Inventory (A) | Accounts Payable (L) | ||||
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156.80 | ||||
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Balance Sheet | Income Statement | |||||
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(2a) |
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156.80 |
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15 |
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156.80 | ||||
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period ends.
(2b) | |||
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3.20 | ||
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160.00 | ||
160.00 |
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©2020 Cambridge Business Publishers 17
Accrued Liabilities
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18 | |
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Accounting for Accruals
1) |
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(1) |
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300 |
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2) |
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period.
Balance Sheet | Income Statement | |||||
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(2) | 300 | 300 | 21 | |||
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Contingent Liabilities
Not all liabilities are certain
Criteria to be met before recognizing:
©2020 Cambridge Business Publishers 22
23 |
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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
1) |
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(1) |
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2,000 |
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Warranty Repairs / Replacement
2) |
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Balance Sheet | Income Statement | |||||
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Disclosure for Warranties
Excerpt from Apple’s financial statement notespresented in its 2018 10-K annual report:
©2020 Cambridge Business Publishers
Current Financial Liabilities
29 |
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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
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31 |
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Calculating Interest
Principal x Annual Rate x Portion of Year
Outstanding
32 |
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each quarter (April 1, July 1, October 1, and January 1).
(1) | (1) | 33 | |||
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3,000 | |||||
Cash (A) |
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3,000 | ||||
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Balance Sheet | Income Statement | |||||||||||||
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©2020 Cambridge Business Publishers 37
Debt Securities
When a company issues bonds, it is borrowing money. |
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Explain and illustrate the pricing of long-term nonoperating
liabilities.
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Also known as the contract |
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41 |
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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
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= $270,226 |
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Valuing Bonds Issued at a Discount
$400,000 × 8% × 6/12 = $16,000
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Market interest rate per period:
10% annual rate / 2 payments per year = 5% per period
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= $369,112 |
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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)
= $434,119 |
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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
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Coupon | Equal to | 50 | |
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Rate | Rate | ||||
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$400,000 bonds | Less than | ||||
sold at a discount | |||||
$400,000 bonds |
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Greater | |||
than face | |||||
sold at a premium | |||||
value | |||||
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Interest payments | ||
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= | ||
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= $190,887 | ||
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Offers debt
investment to the
public Referred to as a
tombstone
52 |
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Issuing Bonds at Par
$400,000 bonds with 8% coupon rate, issued at par:
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400,000 |
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Bonds Payable (L) |
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Issuing Bonds at a Premium
$400,000 bonds with 8% coupon rate, issued at a premium, 6%market rate:
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Reporting Bonds
on the Balance Sheet
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Bonds payable, face $400,000
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A benefit |
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The $16,000 interest payment was made on the $400,000, 8%
bonds, issued at $369,113 (10% market rate).
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60 |
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0 | $13,024 | $16,000 | $2,976 |
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61 |
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1 | 31,145 | 431,145 | ||||
2 | 12,934 | 16,000 | 3,066 | 28,079 | 428,079 | |
3 | 12,842 | 16,000 | 3,158 | 24,921 | 424,921 | |
4 | 12,748 | 16,000 | 3,252 | 21,669 | 421,669 | |
5 | 12,650 | 16,000 | 3,350 | 18,319 | 418,319 | |
6 | 12,550 | 16,000 | 3,450 | 14,869 | 414,869 | |
7 | 12,446 | 16,000 | 3,554 | 11,315 | 411,315 | |
8 | 12,339 | 16,000 | 3,661 | 7,654 | 407,654 | |
9 | 12,230 | 16,000 | 3,770 | 3,884 | 403,884 | |
10 | 12,117 | 16,000 | 3,883 | 0 | 400,000 | |
3% |
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$16,000 - |
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$13,024 | ||||||
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Cash (A) |
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Financial Statement Effects of Bond Repurchase
Bonds trade in secondary markets between
(indenture)
Call provision gives the company the right to repurchase its bonds
63 |
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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
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66 |
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A measure of solvency
Measures the corporation’s financial leverage
Applying the Debt-to-Equity ratio to Verizon: |
©2020 Cambridge Business Publishers 68
©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
TIE = | ||
---|---|---|
Interest expense | ||
Applying Times Interest Earned ratio to Verizon: |
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|
73 |
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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 debtCovenants
Restrictions specified in the debt agreement
Provide debt holder a means of control over the issuer’s operations
Financial Accounting Sixth Edition
Cambridge Business