chapter 10 liabilities

current ratio

permits us to compare the liquidity of different-sized companies and of a single company at different times

bonds represent

promise to pay sum of money at designated maturity date, plus periodic interest at a contractual (stated) rate on the maturity amount (face value).

The term "payroll" pertains to both:

salaries and wages

difference between secured bonds and unsecured bonds

secured bonds have specific assets of the issuer pledged as collateral for the bonds, unsecured bonds are issued against the general credit of the borrower

What do board directors have to do in regards to bonds?

stipulate number of bonds to be authorized, total face value, and contractual interest rate.

Wages

store clerks, factory employees, and manual laborers (rate per hour).

current liabilities include accrued liabilities such as

taxes payable, salaries payable, and interest payable.

bonds are generally issued when

the amount of capital needed is too large for one lender to supply

State laws grant corporations

the power to issue bonds

Notes Payable

Written promissory note. Require the borrower to pay interest. Issued for varying periods.

Bond Basics

A form of interest-bearing notes payable. Issuing bonds (and common stock) enables a company to obtain large amounts of LONG-TERM CAPITAL

Unearned Revenue

Revenues that are received before the company delivers goods or provides services.

Sales Tax Payable

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 state's department of revenue.

bond indenture

bond contract

board of directors and stockholders must approve

bond issues

convertible bonds

bonds that can be converted into c/s

callable bonds

bonds that the issuing company can retire at a stated dollar amount

disadvantage of bonds

company must pay interest on periodic basis and they must also repay the principal at the due dte

current ratio formula

current / current liabilities

formula for working capital

current assets - current liabilities

Corporation records bond transactions when it

issues (sells), retires (buys back) bonds and when bondholders convert bonds into common stock.

Salaries

managerial, administrative, and sales personnel (monthly or yearly rate).

Current liabilities include

notes payable, accounts payable, unearned revenues

long-term liabilities

obligations that are expected to be paid after one year

Interest payments usually made

semiannually

Unearned Revenue 1. Company debits ____, and credits a _____ ______ _____ (unearned revenue). 2. When the company earns the revenue, it debits the ______ _____ _____, and credits a _______ ______.

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.

Current liability is debt with two key features

Company expects to pay the debt from existing current assets or through the creation of other current liabilities. Company will pay the debt within one year or the operating cycle, whichever is longer.

Payroll tax expense results from three taxes that governmental agencies levy on employers

FICA tax Federal unemployment tax State unemployment tax

liquidity

refers to the ability to pay maturity obligations and meet unexpected needs for cash

Paper certificate, typically

$1,000 face value.

Determining the payroll involves computing three amounts:

(1) gross earnings, (2) payroll deductions, and (3) net pay.

Market value is a function of the three factors that determine present value:

1. dollar amounts to be received, 2. length of time until the amounts are received, and 3. market rate of interest.

adv of bond financing

1. stockholder control is not affected (bondholders don't have voting rights, so stockholders retain full control of company) 2. tax saving results (bond interest is deductible for tax purposes; dividends on stocks are not) 3. earnings per share may be higher (although bond interest expense reduces net income, earnings per share on common stock often is higher under bond financing because no additional shares of c/s are issued.

Current Maturities of Long-Term Debt

Portion of long-term debt that comes due in the current year. No adjusting entry required.