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.